An instant loan can come to your aid in many ways. From helping you meet your financial obligations to upgrading your lifestyle, you can rely on a personal loan any day. With features like quick application, instant processing, easy disbursal and worry-free repayment, a personal loan has emerged as the most preferred financial tool. With competitive interest rates, it is also more affordable than using a credit card or liquidating your assets. Thus, there are many reasons to avail an instant personal loan, but did you know it can help you build your credit score too?
A solid credit score is very important for every individual. Firstly, it affects your eligibility for availing credit. Secondly, having a solid credit score can help you negotiate better terms on your instant loan or credit card. Thirdly, whether you like it or not, you may require a personal loan to meet your urgent financial crunch any day. Finally, your credit score also matters when you apply for a job or start a new business or go on house hunting. Thus, working towards building a solid credit score is a very important financial responsibility.
Before moving on to how these instant loans help build your credit score, here’s a quick look at the scope of this score for a better understanding.
Know What Credit Score Means and Its Importance in Borrowing
Credit score is a 3-digit number that is assigned to every borrower by the credit bureaus. The score is assigned on the basis of your credit history. This includes your previous borrowing habits, defaults, repayments and more. The score is assigned in the range of 300 and 900. If someone holds a credit score of zero, it indicates that they have not had any borrowing history in the past and that they are first-time borrowers.
In the context of borrowing, especially unsecured borrowing like an instant loan, credit score holds critical importance. When assessing a loan application, lending institutions run a check on the borrower’s credit score to determine how they have fared related to their history of managing credit, right from availing to repaying the advance.
You can try improving this credit score by availing small ticket personal loans through a loan app and making its repayment on time. Read on to know how these loans bring a credit score building opportunity for the borrower.
Ways in Which Personal Loans Contribute to Building Credit Score
A personal loan provides you the opportunity to add essential info to your credit history, thus helping impact your credit profile. Below are some crucial ways in which it can be a great tool for impacting your credit score positively both in the short and long run.
Note that credit score calculation and history creation is primarily dependent on factors like new debt availed, loan types taken, total debt liability, repayment record, period of availing credit and the debt to income ratio of the individual’s finances.
Various factors related to the instant loan can help impact these aspects if taken care of in time. They include the following.
- It helps create your credit profile
If you are a first time borrower, then the credit bureau will not have your credit profile. This makes it hard for lenders to analyse the risk associated with your loan application. Availing a small ticket instant loan can help in creating your credit profile. By furnishing your loan EMIs on time you will build a strong credit report. This is very important if you are planning to avail a big ticket loan like a car loan or a home loan.
- It can balance out your debt mix
The right credit mix depicts disciplined borrowing tendencies of the individual. Instant loan is an unsecured loan that can help diversify your credit bag. This will balance out any existing secured loans that you may be servicing. This will send a positive credit history indication.
- Improvement in credit utilisation ratio
Your credit utilisation ratio is formed as a percentage of total credit used as against the total availability calculated monthly, which should ideally be under 30%. In case you are servicing multiple small loans or using credit cards, you can use a personal advance to repay them and bring down your overall credit utilisation. You must make your personal loan EMI payments on time.
- Chance to improve repayment record
To keep your credit score appreciated, maintaining a good repayment record is a must. You can thus make sure to stick to your instant loan repayment schedule and make sure that you pay the EMIs in time and in full to impact your score positively.
- Extended credit history creation for reliability
A long and clean repayment history also contributes to building your credit score. The extended tenure periods of personal advances thus present just the right opportunity for positive credit history creation over a long term.
At the same time where the instant loan opens up the opportunity for building credit score, planning ahead for the borrowing can be of essence to the individual. For instance, avoiding making multiple loan applications helps save on hard enquiries sent to their profile, which often impacts the score negatively. Similarly, borrowing within strict affordability keeps the borrower from creating a debt mountain that may overburden their finances unnecessarily and hurt their credit history.