5 Ways to Boost Your Credit Score with a Personal Loan

Before granting a loan to a customer, the lending bank or financial institution carries out various checks to ensure that customer will pay the loan back along with the due interest. One of the major factors that often affect the bank’s decision to lend money to an individual is his/her credit score.

If you have a good credit score, you get loans rather easily. In fact, housing financial accounting companies offer better interest rates to those with higher credit scores. If you want, you can boost your credit score in a number of ways. But did you know that a personal loan can also help you improve your credit score?

Well, a majority of people know that the credit score depends on the individual's credit history, amount of debts, current loans, repayment history, and more. However, only a few people know how to use a personal loan to improve their credit scores.

Here are some effective ways to use a personal loan to improve your credit score:

1.      Using a credit-builder loan:

A credit-builder loan is a type of loan where you make fixed payments month after month toward the amount of the loan. Once you make the complete payment with interest, you finally receive your funding. It may feel a bit counter-intuitive since you do not get access to the borrowed money until after you have paid it off, but that is the whole point of this loan.

At the end of your payments towards the loan amount, you will have credit built through your monthly payments. Also, you will gain access to a savings account with the total amount of the loan in it. In the end, you will have the money without any strings attached, completely paid off. How good is that?

2.      Debt consolidation:

One of the more strategic ways to use personal loans is to consolidate debt. Suppose you have four credit cards, each with an outstanding balance on them. You are making four different payments every month at four different interest rates. Now, you can take a personal loan and use the borrowed money to pay off all four credit cards, and then pay the loan back with one payment per month.

What is more interesting about the strategy is that you save some money in the process. This is because personal loans often have a lower interest rate than credit cards. In the process of debt consolidation, you will boost your credit score by making the due payments and resetting the balance on your Assignment help company cards.

3.      Building a good payment history:

As mentioned earlier in this blog, your payment history is one of the many things that affect your credit score. So, you need to make sure that your personal loan payments on time to build a good payment history. It is wiser to take a personal loan when you are confident about making the payments on time. Otherwise, it can reflect poorly on your credit score.

Always remember to make the payments in full every month. If your bank has the option to set up automated payments, utilise that option for timely payment toward the personal loan amount. If you don't have such an option, you can set reminders for payment and be disciplined with the payment every month. If you can manage to make timely payments, it can help boost your credit ratings.

4.      Lower your credit utilisation:

The credit utilisation ratio is another factor that impacts your credit score. Credit utilisation refers to how much you owe with respect to the spending limit on your credit card(s). Most people have a mix of revolving lines of credit, including high-interest credit cards. Adding a personal loan to the lot can help reduce the credit utilisation score and improve your credit score significantly.

As already mentioned, you can consolidate debt by taking personal loans. If your credit cards remain open after transferring the balance to a personal loan, your credit utilisation ratio goes down. So, you keep the credit cards open and don’t run up a balance on them again. It will help you improve your score over time.

read: How to Get a Second Mortgage Loan in India?

5.      Enhance your credit mix:

Credit mix is the diversification of the various loans or lines of credits that the individual is currently paying off. And as you may have guessed already, this is another factor that determines the credit score of individuals. Adding personal loans to the mix can have a positive impact on the credit score as it indicates that the individual has experience in managing different types of credit.

Credit mix count for 10% of an individual’s credit score. If you only have one type of credit in your profile, it shouldn't have a huge impact on the credit score. It is comparatively difficult to reach the "800 club" without a variety of credits. So, if you did not have a personal loan before, adding a personal loan to the mix can help your boost the credit mix.

 In conclusion,

You now must have a good amount of knowledge about how to improve your credit score with a personal loan. However, a personal loan can also affect your credit score negatively if you are not careful. So, you also need to be aware of the risks associated with the use of personal loans to build credit. As long as you use these aforementioned tips, you can improve your credit score easily.



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