Personal loans can have both positive and negative effects on your CIBIL score, depending on how you manage them. It is vital to ensure that you do not miss any instalment towards repayment of loan.
Defaulting on a personal loan can substantially damage your credit score. Payment history is one of the most critical factors in determining your credit score, so any late payment will cast a shadow on the credit score.
Here’s how personal loans can impact your credit score:
Credit utilisation: Personal loans can increase your total available credit, which can lower your credit utilisation ratio if you don’t use up all the available credit. A lower credit utilisation ratio generally reflects positively on your credit score.
Regular payments: Making timely payments on your personal loan will impact your credit score in a positive way. It shows to lenders that you are reliable and capable of managing credit responsibly.
Credit history length: Taking out a personal loan can slightly bring the average age of your credit accounts lower, particularly if it’s your newest account. As you make on-time payments and keep the account in good standing, it can contribute to your credit history in a positive way.
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Credit mix: Having a diverse mix of credit types, including instalment loans such as personal loans, can positively affect your credit score. Banks like to see that you can handle different types of credit responsibly.
Hard inquiries: Applying for a personal loan can result in a hard inquiry on your credit report, which can lower your credit score temporarily. However, if you manage the loan well and make timely payments, the positive effects are expected to outweigh the drop caused by the inquiry.
If you manage your personal loan in a responsible way by making timely payments and avoiding default, it can have a positive impact on your credit score by improving your payment history, credit mix, and credit utilisation.
Frequently Asked Questions:
Does checking your credit report impact your credit score?
It does not impact your credit score. As a matter of fact, it is advisable to keep checking the score from time to time.
How can you improve the credit score?
You can work on improving your credit score by making timely payments, reducing outstanding debt, and maintaining a healthy credit utilisation ratio (CUR) before applying for a car loan.
How can you secure your personal information?
You can protect your personal and financial information by using strong passwords for online accounts, and you should avoid sharing sensitive details over unsecured networks or with unknown parties.
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What does the CIBIL score above 700 indicate?
A CIBIL score over 700 shows a good credit history and demonstrates to the lender that you are likely to repay the loan on time.
What is the key disadvantage of taking loan with poor CIBIL score?
The key disadvantage is that lenders give loan at a higher rate of interest as compared to borrowers with better credit scores.
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Published: 26 Apr 2024, 12:18 PM IST