Often referred to as a borrower’s creditworthiness, the credit or CIBIL score plays an integral role in the process of applying for a loan. Lenders consider the CIBIL score useful to determine the financial habits of a person. A healthy CIBIL score conveys that the borrower has a good chance of repaying the loan on time which obviously gives assurance to the lender. Thus, borrowers are advised to maintain a good CIBIL score before applying for a loan.
Furthermore, a good CIBIL score lies between 750 to 900 and can help you get a loan quickly at lower rates of interest. Whereas, a low credit score can result in your loan application getting rejected by the lender. The credit score determined by the credit bureaus is based on these five factors:
- Credit history
- New debt
- Type of loans taken
- Total debt owed
- Length of the credit period
So, how can you improve your credit score? Well, there are multiple ways of achieving a good credit score and one of them is taking a personal loan.
What is a Personal Loan?
Personal loans are unsecured loans that don’t require the borrower to pay any collateral. They are also referred to as ‘all-purpose loans’ as the borrower can use the loan for any purpose without any restrictions by the lender. Moreover, personal loan eligibility criteria are usually flexible and require minimum documentation. In most cases, a borrower only needs a healthy CIBIL score for personal loan application. Thus, they are most suitable for medical emergencies, debt consolidation, funding a wedding or paying any other immediate expenses.
But, how does taking a personal loan help improve your credit score? Read further to find out.
How Can a Personal Loan Affect Your CIBIL Score?
While applying for a loan, your credit history plays a crucial role and taking a personal loan can help improve it. This happens because if you haven’t borrowed funds in the past, then you won’t have any credit history. This can result in a low credit score and thus, taking an unsecured loan will add a financial activity in your credit history. Remember, a good credit score is achieved by a healthy mix of credits.
In addition, taking a personal loan can help in reducing the credit utilization ratio which is another key factor in determining your credit score and is taken into account by credit bureaus. Also, other determinants of credit score such as the credit mix and length of credit history get positively affected too.
Therefore, borrowing a loan and repaying it on time can actually help you improve your credit report over time and increase the CIBIL score.