How Personal Loans Can Impact Your Credit Score?
If you already have taken a personal loan, chances are that this can severely impact your credit score as well. Personal loans are not bad for your credit scores, but if the payments are delayed severely, there might be some consequences. This is, however, a short-term thing, and it does not just stay; once the amount is repaid, the credit score comes back to normal. You need to decide and stay within your limit while opting for a personal loan. Some of the important concepts regarding credit scores and personal loans are stated below.
Correlation Between Personal Loan and Credit Score
Credit score is normally calculated on the basis of five essential factors, which are as follows:
- Payment history
- Length of the credit history
- New credit lines, if any
- Credit mix
- Amounts owed to the banks or NBFCs
The exact way the ratings are calculated by credit bureaus in India might vary. However, as per FICO, these rates are decided in the following ways:
- 10% due to new debt or newly opened credit lines.
- 10% of the scores are affected due to credit mix, etc.
Although the exact parameters are variable among the three credit bureaus of India, these few of them are common. For personal loans, the credit mix is getting revised, and this is directly responsible for affecting the credit ratings of the person.
Credit rating agencies might review the financial activity that you have been doing, and based on that, your lines of credit might be affected. Take an example where you are getting one line of credit as a short-term loan and you also apply for a personal loan.
In such cases, the financial institutions might review such activity and lessen your credit scores. When this happens, the lending bodies might not allow you to take more funds.
Can a Personal Loan Enhance Your Credit Rating?
Answering this topic is somewhat hard, and it is not wholly dependent on lending institutions. However, as a borrower, the best thing to undertake is to complete the financial repayments on time. If you are responsibly clearing your personal loan dues, it is going to help severely in your career as well. Unfortunately, if you are a person who has never taken any credit, chances are your credit scores are already low. After all, a person who never has any debts and repays them in timely instalments does not acquire any payment history with the credit bureaus of India.
New Credit and Personal Loan Application
New credit is one of the latest factors that the credit bureaus take into consideration. Every time you apply for a new loan, the credit falls slightly. This is the reason that many people do not take many loans and only initiate a single loan to manage their financial needs. More applications for loans downsides your credit rating, and this is a dicey situation to stay in. However, such dips are minor, and if you have a good repayment history, it will not affect your personal loan application. Once you are starting to repay the personal loans on time, the credit rating improves, and this showcases a better opportunity for getting more credits.
What Happens If I Do Not Clear Repayments on Time?
As we have mentioned already, personal loan repayments are directly linked with the credit bureaus. Thus, if you have already taken a loan and have made defaults on your payment, chances are your credit score is already reflecting that. It is always advisable to make proper timely payments and ensure that your credit score remains above 750, as a lower credit score makes you a bad borrower in the eyes of banks and credit lending organisations.
Conclusion
If you are opting for financial assistance, a personal loan app can be a great way to get your cash needs sorted. However, as we have mentioned, timely repayments are important as they affect your credit rating.
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