How to Use a Personal Loan to Build Credit Score?


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You don’t quite know when you will be in need of credit in your life. Maintaining a good credit score makes it much easier for you to get credit, as and when you need it.

How to Use a Personal Loan to Build Credit Score

Confused? We will make it simpler for you!

A good credit score conveys a better credit risk about you to your potential lenders. This is the reason why, if you are in an urgent need of funds to address an exigency at home, your lender won’t hesitate to grant the same to you in short notice. Hence, it is highly imperative for you to keep a close watch on your CIBIL Score and find out ways to improve the same.

The higher your score is, the more creditworthy you will be to the lenders. This determine where you stand in the eyes of the lenders and the interest rates and other terms you will be offered will heavily depend on it. In addition, things like your credit card limits, renting an apartment etc are also affected a big way by your credit score.

This is prepared by CIBIL (Credit Information Bureau India Limited) is widely used by banks/NBFCs to evaluate your eligibility. This 3-digit number can summarize your entire credit history as well.

So, this was in brief its importance but do you know that a personal loan can also be used to build or improve your credit score?

We will tell you how!

You can take a personal loan to pay off your outstanding debts

If you have too much of outstanding debts on your plate, it reflects badly on your report and conveys to lenders that you are not particularly efficient in handling credit. If you are struggling to repay your debts, a loan from a lender can come to your rescue. You can take a personal loan and can clear off your debts as soon as possible. Once the load of outstanding debt is off your shoulders; you can restart with new credits, with new and improved terms. Clearing off your outstanding debts quickly improves your payment history and, in turn, improves your score. You can also Check EMI Through Personal Loan Calculator.

When you repay your personal loan EMIs on time, your score improves

It’s very important for you to understand that your payment history accounts for a good chunk (about 35%) of your credit score. If at all there is a lapse in your payments due, it impacts your history negatively and your score gets a pounding. On the contrary, making timely payments conveys to the potential lenders that you are a responsible borrower and you know how to take care of your credit. Your habit of making timely payments ‘informs’ the creditors that lending money to you will not be a risky proposition for them at all. If for some reason, it’s not possible for you to make a timely payment at any point in time, you should inform the same to your creditors well in advance and most creditors will not be mindful of this. Alternately, you may pay the minimum amount at least, on or before the due date and negotiate with the creditors for further payment arrangements, without reflecting the lapse on your credit report.

Now that you know that you can’t afford to delay your payments, if you want to improve your credit score, it will be a great idea to get a loan and start paying the EMIs on time. As the amount to be repaid is broken down to equal installments it puts less strain on you and keeps you in a good shape to repay the monthly dues on time. This way, you can keep your good habit of making timely payments going. Making timely payments for a prolonged time period will put a good reflection on your history and will help you a great deal to improve your score.

A few things to consider while availing a personal loan to build credit score

• Avoid applying for multiple personal loans

You should apply for credit only when it is absolutely necessary. Applying for multiple personal loans will present you as ‘credit hungry’ to the lenders. Too many credit applications can impact your credit score negatively as well as it can invite too many hard inquiries into your credit report. Having too many hard inquiries is considered as a negative point on your credit profile and such hard inquiries may continue to reflect on your credit report for 2 years. Having too much credit at your disposal may also tempt you to overspend and thus, you may accumulate more debt.

• Take the personal loan amount strictly as per your need

Do take care that you apply only for the amount you need. The loan amount is an important factor if you want your loan to improve your credit score over a period of time. Taking a loan amount beyond your affordability will put undue strain on your regular budget and you may struggle to pay the monthly EMIs on time.

• Do not foreclose your personal loan prematurely

Please bear in mind that a lender considers both your long-term and long-term creditworthiness. Even if you are financially sound enough at a particular point in time to foreclose your loan, we would advise you not to do so before the loan tenure ends. At best, you can pay a bulk amount to bring the EMI down, while keeping the tenure same as before. This will help you to continue making timely payments every month for a longer time period and will improve your credit in the long run.

• Do not be in a hurry to avail more credit

This is really important. As you start paying your personal loan EMIs on time, you go up the ladder as far as your credit score is concerned. Naturally, your credibility and potential repayment capacity increase in the eyes of the lenders and they will be more than eager to give you credit. Along the way, you will start receiving seemingly irresistible offers and it may become increasingly hard for you to avoid them. But we will advise you not to fall into this ‘debt-trap’. As discussed earlier, applying for multiple credits will only hamper your credit score.


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