Whether you have been hit with a medical emergency, funding education, want to travel around the world, a personal loan can be a helpful way to solve these problems. However, many believe that taking a personal loan would negatively affect credit score, which is untrue. Taking a personal loan doesn’t automatically have a deleterious effect on your credit score. It can impact your credit score in several ways-both good and bad. To understand how a personal loan would affect credit score, it is important to know how the credit score is calculated.
Working of Credit Score
A credit score is a number that indicates a customer's creditworthiness. Credit bureaus like CIBIL use many important factors to calculate someone's credit score. Some of the most critical factors include your credit history, credit utilization, credit history length, Credit mix, and New credit. Based on these factors your score may increase or decrease. As long as you have a steady stream of income and repay loans or credit on time, you will be rewarded with a healthy credit score. You can do a credit score check by visiting the website of these bureaus.
Impact of personal loan on credit score
Unlike other loans, a personal loan is different, as no collateral is offered to cover a personal loan. As far as the credit rating is concerned, using a personal loan is considered to be a better option than using a credit card. This is because taking a personal loan can help in reducing the ratio of credit utilization. Making your loan payments on time helps to establish a positive credit history. In short, taking a personal loan can help you improve your credit score.
Considering the negative impact, taking a personal loan just to increase credit score needs to be taken with much caution. When you apply for a personal loan lenders will do a hard inquiry, that may negatively impact your credit score. If you can take up a personal loan with a lower interest rate, it becomes a useful medium.