How Do Personal Loans Affect Your Credit Score?

Although termed an expensive method of borrowing money, a personal loan is one of the best options for financial emergencies. The reason is simple, you don’t need to mortgage your assets as collateral, and it can be availed with easy formalities. Personal loans, when managed smartly, might improve your credit score and open doors to additional credits.

A good credit score gets you personal loans effortlessly. Yes, you heard it right! Money lenders scrutinize your credibility before granting unsecured loans. Once the borrower meets the criteria, they can avail of loans at fairer interest rates.

Does Applying for a Personal Loan Affect Your Credit Score?

Yes, personal loan affects credit score in many ways. Applying for a personal loan drips your credit score ratings for a short period. This impacts your market credibility, and obtaining additional loans may be difficult.

On the other hand, your overall score graph rises upward when you pay off loans within the stipulated period. 

Credit agencies like SBI personal loan and money lenders investigate your credit reports minutely. Your overall credit history is important in defining your credibility to pay off debt. Timely payment and smart debt management lessen the impact and give you a fairer score.

Things to Keep in Mind When Applying for Personal Loans for Better Credit Score

1. Never apply for multiple loans

A hard inquiry is initiated to know your trustworthiness and credibility when applying for loans. More enquiries hugely impact credit score ratings, and you might face loan rejections.

2.Pay Regularly 

Personal loans may boost your credit score but not when you delay EMI payments or come out as a defaulter. Unsecured loan positively impacts your ratings only when you pay monthly instalments timely.

3.Never Pre-Pay Your Loan

Defaulting EMI payments negatively impacts your credit score. Similarly, pre-payment has its after-effects. If you are taking a loan to improve credibility, you should not pay before maturity. Longer credit history is better for a good score.

4.Decide the Amount Smartly

While applying for a loan, decide the amount smartly. Always apply for the loan amount you need if you are trying to build a credit score. Asking for more than required may lead to unnecessary hassles of raised interest rates and monthly instalments.

Credit score usually ranges somewhere between 300-900. The higher the credit score, the better the chances of getting low-rate interest on favourable terms. According to FICO, creditworthiness is segregated into five categories;

  • Poor– below 580 will rate you as a risky borrower.
  • Fair– scores ranging between 580-669 are considered below average. However, few money lenders may still approve.
  • Good – Ratings anywhere between 670-739 is more than below average and improve the chances of getting a fairer loan.
  • Very Good –if your scores are between 740-799, money lenders consider you as dependable borrowers and choose to lend money willingly.
  • Exceptional – above 800 is an exceptionally high credit score that may lead to heavy competition between lenders to offer you a loan on favourable terms.

The key line is that personal loans will hit credit score slightly, but there is always a chance to regain it with smart pay-off decisions.

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