You may need a personal loan to pay off medical bills, plan a wedding, or to take a family vacation. But what else? Applying for a personal loan can also help you improve your credit or CIBIL score. Credit score or CIBIL scores are based on your credit history and having a good one can ensure that you can avail credit as and when the need arises. People often use repayment of credit on credit cards to improve their credit scores. Howevr, credit cards pose the risk of disturbing your expenditure patterns if you don’t act wisely. The non-payment of credit card bills has the worst impact on your credit scores. Since credit cards pose such a risky option, people are increasingly choosing personal loans and its repayment to improve credit score instead.
1. Establishing Payment History
Credit scores are dependent on your credit history. If you undertake a loan and follow a repayment schedule, chances are you will boost your credit scores. Timely and consistent personal loan repayment indicates to credit bureaus that you are a responsible borrower and this is reflected in your credit score. In this sense, personal loan is one of the fastest and most effective ways of boosting your credit score.
2. Repayment of Old Debts
A personal loan can be used to clear off old debts. Sometimes old debts can become unmanageable for various reasons. A new personal loan with an effective modified payment structure can help you revise debt according to your convenience. This can help maintain a positive payment history and ensure that credit scores remain unaffected by old debts.
3. Debt Consolidation
Although it is a simple and long known financial trick, it remains one of the most effective ones in helping you improve your credit score. A personal loan can be used to pay off a number of high-interest loans and credit dues with a single consolidated EMI (generally at a lower rate). It reduces the risks of managing multiple loans on a monthly basis as well as lowers the overall interest rate. This can help address consistency issues with repayment of loans and in turn positively affect your credit score.
4. Lower Credit Utilization Ratio
By opting for a personal loan instead of overusing credit cards for large payments, you can help maintain a low credit utilization ratio. The credit utilization ratio refers to the proportion of credit used to that available for use. For instance, if a credit limit of Rs. 2 lakhs is available to you and you have used Rs. 50,000, then your credit utilization is 25%. If you already have a high credit utilization, a personal loan can be used to lower the same and help improve credit scores in the process.
In short, personal loans can not only help you solve your credit score problems but also simultaneously address issues of multiple loans by consolidating debt. A low-interest loan rate, in particular, can be used to pay off multiple higher-interest debts. Tata Capital offers low-interest Personal loans with a flexible tenure and affordable repayment options.