We are all spending everyday working on our careers, families and lives, but it is only when the need for sudden funds arises that most people look into their eligibility for a personal loan and that's when they release the importance of their credit score.
The credit score is the score maintained by certified Credit rating agencies and it is a rating or grading of a person's creditworthiness. Creditworthiness means a person's capability to pay back all their loans taken – this is mainly calculated based on the regularity at which old loans are paid on time, the limit of rolling credit (such as credit card dues) being utilized, as well as some other criterion. CIBIL score for personal loan is one such widely respected credit rating – which lenders rely on for gauging the creditworthiness of the person applying for the loan.
Personal Loan to Build Credit Score
Did you know that by taking a personal loan you can manage to lower your credit score in certain cases? This seems confusing – until we explain the reasons and circumstances in which such a move will increase your credit score.
Taking a personal loan to build your credit score works in the following circumstances:
- Too many small loans: If You have many small loans and are consistently getting late or defaulting on payments or missing the timelines for payment. You may have taken several small loans as and when the need arose and now the process of meeting all the timelines is difficult and taking too much time and effort. In such a case, by consolidating all of these into a single personal loan with only one EMI to be tracked and paid on time will help you raise your credit score with timely and regular payments.
- Revolving payment debt / Credit card debt: If you are in a circumstance where you have maximized your revolving credit limit – such as in credit cards and are now struggling to make the minimum payments or even missing making those payments then taking a personal loan can help you escape this situation. The point to note with credit card debt is that not only does it build into an extremely large sum due – you are paying a huge interest charge on such dues as well late fees and penalty charges. Not only is it a financial drain but it reflects badly on your credit record and lowers your credit score. In such a circumstance you should take a personal loan from a lender at the best rate of interest that you can get and pay off your revolving debt fully. Over some time when you pay this loan back promptly – your credit score that had got lowered earlier due to high unpaid debts – will slowly improve. Remember to be financially responsible and not incur any further credit card debt. As that will not serve any purpose.
- Converting high-interest loans to low interest: If you find yourself holding loans at high rates of interest then as a way of saving on your high-interest expense – you may get a personal loan at the lowest rate possible as per your personal loan eligibility, and use those funds to pay off the high-interest loans. This way you can consolidate your loans into one as well as work out a lower rate of interest.
You should definitely evaluate the loan that you can afford to pay back before adding another loan to your portfolio.
Must Read: 5 Big Factors That Can Affect Your Credit Score
How to Determine How Much Personal Loan is Viable for you?
When the whole purpose of taking the personal loan is to boost your credit score as well as raise your credit score, then there is one thing to be cautious of – the amount of the loan and the terms of the loan. This means you should only take a loan that you can confidently pay back the monthly instalments of without delay or missing the payments.
There are two excellent tools available which will help you calculate how much personal loan amount you can safely take. These tools are the personal loan eligibility calculator and the personal loan EMI calculator.
- Personal Loan Eligibility Calculator – is a tool that allows you to check your eligibility for a personal loan with various companies. It has some input fields such as your monthly income, net monthly obligations, age, etc. which you can fill in to know the maximum loan amount you may be eligible for. If you check your personal loan eligibility and then apply for the eligible amount – then you might not have to face rejection for the loan application. Every loan application causes lenders to run a hard check on your credit. Too many loan applications themselves can lower credit score but rejected loan applications even more so.
- Personal Loan EMI Calculator – This tool helps you determine how much loan you should take even if you are eligible for more. The monthly EMI should be an amount that you can pay off with regularity and ease. The EMI should ideally be less than 30-40% of your Net Monthly income. By using the personal loan EMI calculator you can calculate the EMI amount suitable to you by juggling the loan amount, the loan tenure and the interest rate. When you find an amount that you know you can confidently pay, that can be the amount, tenure and rate of the loan that you get for this personal loan to raise your credit score that you are taking.
As simple as it is – it takes patience, discipline and sacrifice to get out of a debt situation but with these qualities, you can certainly do it.