Your credit score plays a crucial role in your financial health, affecting loan approvals and interest rates. But what happens after you have secured a personal loan?
When managed responsibly, a personal loan can help you improve your credit score and build a strong credit history. However, missed or late payments can have the opposite effect.
This article delves into how responsible borrowing can positively impact your credit score and the key factors to consider when taking out an instant personal loan.
How a Personal Loan Can Help Improve Your Credit Score
1. Builds a Positive Payment History
Timely repayment of loans is one of the most significant factors affecting your credit score. Paying personal loan EMIs on time each month helps establish a history of responsible borrowing, signalling to lenders that you are a reliable borrower and enhancing your creditworthiness.
You can use an online personal loan EMI calculator, provided by well-known lenders such as SMFG India Credit, to plan your budget effectively and stay on top of repayments.
2. Diversifies Your Credit Mix
A balanced mix of credit types can positively influence your score. Having both unsecured credit (such as credit cards and personal loans) and secured credit (such as auto loans or mortgages) demonstrates your ability to manage different types of credit responsibly.
3. Lowers Credit Utilisation Ratio
A personal loan can help reduce your credit utilisation ratio (the proportion of your available credit that you’re using). A lower ratio, ideally of 30% or below, improves your credit score and makes you appear less risky to lenders.
4. Helps Establish Credit Profile for New Borrowers
For individuals with a limited credit history, taking out a personal loan and repaying it responsibly can help build a strong credit profile. Consistent, on-time payments demonstrate reliability, improving the chances of qualifying for other financial products in the future.
Pitfalls That Can Hurt Your Credit Score
While a personal loan can boost your credit score, mismanagement can have negative consequences. Here’s what to avoid:
1. Late or Missed Payments
Even a single missed EMI can negatively impact your credit score. Lenders report late payments to credit bureaus, and repeated delays can significantly damage your creditworthiness. Frequent missed payments can make it harder to qualify for future loans. Setting up automatic payments or reminders can help ensure timely repayments.
2. High Debt Levels
Taking out multiple loans or borrowing more than you can afford increases your overall debt burden. A high debt-to-income ratio (30% or above) may signal financial strain to lenders, making it harder to secure future credit.
Additionally, having too much debt relative to your income can put a financial strain on your monthly budget, increasing the risk of default.
How to Maintain a Good Credit Score with a Personal Loan
To ensure your personal loan benefits your credit score, follow these responsible borrowing practices:
1. Borrow Only What You Can Repay
While a personal loan offers financial flexibility, only borrow an amount you can comfortably repay. Overextending yourself can lead to repayment difficulties and a negative impact on your credit score. Consider your monthly income, expenses, and existing debts before taking out a new loan.
2. Monitor Your Credit Report Regularly
Check your credit report periodically to ensure accuracy. Errors or discrepancies – such as incorrect loan records or unauthorised enquiries – can affect your credit score. If you spot any inaccuracies, report them to the relevant credit bureau for correction. In India, you can generally access your free credit report once a year from major bureaus like TransUnion CIBIL, Experian, Equifax, and CRIF High Mark.
3. Use a Personal Loan EMI Calculator
A personal loan EMI calculator helps estimate your monthly instalments based on the loan amount, tenure, and interest rate. Understanding the impact of the loan on your monthly finances enables better budget planning, ensuring you allocate enough for EMIs while covering other essential expenses.
Conclusion
A personal loan can indeed improve your credit score – provided it’s managed responsibly. By making timely repayments, borrowing only the amount you need, and using an EMI calculator for effective financial planning, you can build a strong credit profile.
However, mismanaging a loan – such as missing payments or overborrowing – can have the opposite effect, hurting your credit score and making future borrowing more challenging.
Responsible borrowing helps meet your financial needs while enhancing your creditworthiness for future opportunities.
*T&C apply. Loan eligibility, loan terms, and loan disbursement processes are subject to the lender’s policy at the time of loan application.
