A personal loan is specifically popular because of its uses and simple availability. It is an ideal way to simply cover your unexpected financial requirements or exigencies as it does not demand any security or collateral, and the approval procedure is way faster than other credit options. Most lenders have this product in their loan offerings.
While having a good credit score is important to avail of a personal loan, the opposite is true. If managed carefully, a personal loan can assist you in ameliorating your score. Before we delve into the relationship between a personal loan and credit score, it is important to have a rough understanding of both the products.
What is a personal loan?
A personal loan is a kind of loan that is used to mitigate personal financial requirements. The ICICI Personal Loan is provided based on your credit score, income level, employment history, repayment capacity, and various other factors. It is a popular product owing to its relative ease of timely disbursal. A few of the ways you can use your personal loan proceed are:
∙ Availing a vacation
∙ Family weddings
∙ Medical exigencies
∙ Construction and renovation
∙ Aiding higher education
∙ Consolidating the existing loan
The majority of personal loans contain basic eligibility requirements – age, monthly income, employment history, documentation etc. Such eligibility criteria are factored in by ICICI personal loan and other lenders. Ensure to always approach the zeroed lender directly in the case of any query. For instance, in case you have availed of an ICICI personal loan, then you can approach ICICI personal loan customer care to directly discuss the offered loan offer and any query that you may have.
What is a credit score?
A credit score refers to a numerical value assigned by the borrower based on your credit history. It is the number ranging from 300 to 900 that decides how credible they are. The closer you are to the 900 number, the better it is for your personal loan approval and vice versa. In India, a credit score is computed by the CIBIL credit bureau depending on various parameters like your credit history, active credit accounts, past payments, credit utilization ratio (CUR) etc. Listed below are the levels for CIBIL score with interpretations.
∙ Over 750 – excellent: This indicates a responsible credit activity. The lender prefers such consumers and offers them a suitable rate of interest as they hold a lower default risk.
∙ Between 650 – 749 – good: There have been some late or missed payments in the past. The lender certainly will grant the loan, but at a higher rate of interest and maybe with additional documents.
∙ Between 500 – 649 – average – Lenders might be hesitant to lend to these kinds of borrowers as their scores may show few risky financial activities. Individuals in such brackets require increasing their scores and may advance up the ladder if they maintain a strong financial habit.
∙ Below 550 – poor: Individuals in such a category are most likely to default on payments in the past or hold uncleared dues. They have a slight possibility of securing a loan as this is of high-risk category for the lenders.
Having a good credit score can make it simpler for you to avail yourself of personal loan approval. Thus, you must ensure your credit score stays above a specific threshold for quick loan approval.
Ameliorating your credit score via a personal loan
The manner a personal loan is utilized may have a considerable impact on your score. When utilized correctly, a personal loan can considerably ameliorate your credit score. In the same way, a poorly managed personal loan may cause a dramatic fall in your score. Here are a few ways to enhance your score with a personal loan:
Timely debt repayments are a mark of good credit behaviour. This demonstrates good financial behaviour, and as an outcome, credit score enhances. An unsecured loan with zero late repayments has a huge positive impact on your score.
The debloating credit utilization ratio
In case you continuously borrow over thirty percent of your credit card utilization ratio, your score will suffer over the long term. A personal loan can cater less strain on your card limit, enhancing your credit score.
Consolidating your existing debts
In case you are juggling between various loans and distinct rates of interest, you can consolidate them into a single personal loan. Note that your monthly interest is lowered if the loan holds a lower rate of interest than the average of your current interest rates. A lower interest burden on your loan makes it simpler for you to repay, and it assists your score amelioration over the long term.
Longer credit history
A longer credit history shows that you have responsible credit behaviour over time. It assists in ameliorating your credit score and profile. You will have zero credit history if you have never borrowed or held a credit card. Availing of an online loan is a good way to begin building a credit history.
Behaviour that lowers your credit score
∙ Accumulating your debt
A personal loan can be used to simply consolidate your existing debt, as previously mentioned. However, if you are having problems staying financially responsible while repaying debts, then it may be looked upon as risky and can damage your credit score.
∙ Multiple hard inquiries on a credit report
When you place an application for a personal loan, hard enquiries are made on the credit report to decide your credibility. While 1 or 2 inquiries will not have a massive impact on your score, too many credit inquiries can. Thus, it is recommended to conduct your homework before applying for a personal loan.
∙ Not selecting the correct lender
Availing of a personal loan with a high rate of interest, processing charges and fees simply adds to your stress. In such cases, being late or missing on any of the payments has a bad impact on your credit score. Thus, selecting the correct lender is of high importance. Before you proceed with a personal loan, assess the lender’s entire range of charges and service levels to decide the best fit.
Personal loans can impact your score. Based on how you use this, it can assist improve or hurting your score negatively. Whatever loan you select, the most crucial thing to note is to practice discipline and repay your debt on time.