Your credit score is an indicator of your creditworthiness. It is one of the most important parameters that lenders check while processing your loan. Whether you apply for a quick loan through a personal loan app or through a traditional lender, your credit score plays a very important role.
A personal loan is an unsecured loan that can help you meet your finances obligations. Whether you need funds to clear your medical bills, or carry out home repairs, purchase a new home appliance or consolidate your existing loans, a personal loan often stands as the best choice. Apart from meeting your financial needs, you may also consider applying a personal loan through a loan app to improve your credit score.
Read on to know how a personal loan can help improve your credit score.
Can A Personal Loan Help To Improve Credit?
Applying for a small-ticket loan through a personal loan app can help improve your credit score, given you make the repayments on time. Availing a small ticket loan through a loan app is simple, convenient and easy to repay. You can avail this loan even if you are a first time borrower. This helps you build your credit record with the bureau.
Your credit score can suffer because of missed payments in the past. Availing a personal loan and making payments on time can help build your credit score. It is especially helpful if you anticipate a big expense like a home loan or a car loan in the near future.
When Can A Personal Loan Aid In Credit Building?
Availing a personal loan through a personal loan app to build credit works great for new borrowers. If you have never availed a loan, then the credit bureau would have no information on your repayment behaviour, thus they do not assign any score to you. This makes it difficult for lenders to analyse the risk associated with your profile. As such, availing a personal loan can be a good idea for building your credit score.
In addition to this, availing a small personal loan through a loan app can be a great idea if you are planning to apply for a bigger loan. It is much easier to make the repayment for small loans and build a strong credit record.
How Can A Personal Loan Help You Build Your Credit Score?
A strong credit score is very important when you think about availing credit from a financial institute. Most lenders check your credit score to analyse the risk associated with your profile before approving your loan application.
Making steady regular payments will not only create your credit history but also boost your credit score. In other words, building your credit history by repaying a small personal finance can make you eligible for bigger personal loan.
Here is how availing a personal loan through a loan app can help build your credit score:
Your Credit History’s Age
It is ideal to start developing credit early because the length of your credit history affects your credit score. A personal loan from a loan app can help establish your credit history. This can be very beneficial if you don’t have any credit history yet. The longer a loan appears on your credit record, provided the payment history is regular, the more probable it is to raise your credit score.
History Of Your Payment
Your credit score is primarily influenced by how you manage your debt. It makes up 35% of someone’s FICO score. Lenders pay particular attention to how you have paid off-or not paid off-debt in the past. Your credit score is seen as a reliable indicator of your propensity to repay future debt. It can suffer if you default or make missed payments on a personal loan.
Adding Additional Credit Types
A mix of various forms of credit, such as credit cards, school loans, and mortgage loans, may also have an impact on your credit score. A good mix of various debts on your credit report will help your credit score.
If you’re making constant, on-time payments, on your credit cards or loan-can have a beneficial impact on your credit score. If all of your credit histories consist of credit cards, adding a personal loan from a personal loan app can help you build other forms of credit and possibly raise your credit score.
Your Credit Utilization Ratio
Having a high debt-to-credit ratio, commonly known as your credit usage ratio, can be detrimental to your credit score, second only to your payment history. Both revolving (like credit cards), as well as installment debt, are taken into account, making about 30% of the overall FICO Score (e.g., personal loans).
Factors That Have A Negative Impact On Credit Score
Although these are general interpretations of credit scores, the following are some things that can harm your score:
- Late payments on credit card balances.
- Not making loan payments on time.
- Applying for or having several credit cards open at once.
- Declaring bankruptcy.
- Frequent credit card use exceeding the credit limit.
- Closing a credit card with a balance that is owed.
Conclusion
Being aware about the impact of your financial decisions can help you manage your finances very well. Improving your credit score through small ticket personal loans makes you eligible for big ticket loans like a home loan or a car loan. Working on your credit score will also help you secure a loan at lower interest rate, and better loan terms.