At present, lenders highly focus on the borrower’s credit score before they approve the loan application. Due to this reason, many individuals planning to apply loan online, including young working professionals, are now focused towards improving their creditworthiness. Even though there are several ways to enhance the credit score, there are several myths surrounding the topic.
For instance, people believe that applying for a personal loan will have an adverse effect on their credit score. However, this is not the truth, and in fact, a personal loan can eventually help you improve your credit score. This article will discuss the effect of a personal loan on your credit score.
The Effect Of Personal Loans On Credit Score
A personal loan via a loan lene wala app, when handled responsibly, can promote long-term improvement of a credit score. The improvement will eventually depend on your other debt consolidation and credit history details on your credit reports. However, with poor management, your credit score might drop.
- Lower rate of credit utilisation
By utilising a personal loan for your debt consolidation, you can boost your credit score. This is so because by reducing the credit card balance, you can eventually minimise the credit utilisation rate or the available credit percentage that you are using.
- More positive payments
The factor that significantly influences your credit score is debt payment history. Your debt payment history is around 35% responsible for your credit score. Hence, making even a single payment 30 days late or above can seriously harm your credit score. However, each payment you make on a personal loan creates a positive payment history, eventually promoting your credit score.
- Enhanced credit mix
When a money lending app monitors the potential creditworthiness of the borrower, they prefer evidence of experience with multiple kinds of debt and different accounts, along with a combination of instalment loans and revolving credit. This complete experience gets summed up in a credit scoring factor known as credit mix, which accounts for 10% of your FICO score.
- Credit score factors
Opting for a personal loan is a better option than going for a credit card when discussing the credit rating. This is so because applying for personal loans helps in minimising the ratio of credit utilisation, which is amongst the most crucial factors for a credit bureau. Additionally, other factors like credit history length are also affected positively due to personal loans in several cases. In short, applying for a personal loan really helps you improve the credit score factors by 90%.
- New credit
New credit is also one of the other essential factors considered by the credit bureau. Each time a borrower applies for a new loan, their credit score slightly falls. This is why it is advised not to apply for multiple loans in a short duration.
However, as this fall is very minor and temporary, it does not affect your credit score in the long run. Hence, once you repay your personal loans on time, this fall gets eliminated, and you eventually get the opportunity to boost your score.
Conclusion:
Whether for emergency expenses, debt consolidation, or other uses, a personal loan comes with the potential to boost your credit score. When managed wisely and responsibly, by keeping all your other debt payments clear, a personal loan stands as an essential tool in enhancing your credit score.
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