How a Personal Loan can Improve your credit score?

A credit score is a three-digit numeric that indicates how likely you are to repay the debt incurred. And it is calculated on the basis of your age, existing credit accounts, repayment history and the duration of credit history. Furthermore, it acts as your first impression for the financial lending institution while applying for a loan.

Before understanding how taking a personal loan helps improve credit score, you must know how credit score is calculated.

Here are five factors involved in the calculation of the credit score:

• 35% is based on payment history demonstrated.
• 30% is based on total outstanding amount.
• 15% is based on the length of credit history.
• 10% is based on the number of open credit lines or accounts, including credit cards.
• 10% is based on any new debt taken.

Credit score usually ranges from 300 to 900 and higher the credit score; more financially reliable you are considered to be. Usually, a score of 750 or above is considered to be good for easy approval of a loan with higher loan amounts & lesser rate of Interest.

What are Personal Loans?

Personal loans are a form of unsecured loans which implies that it comes with no collateral requirement. If you opt for a personal loan, you don’t have to risk any valuable asset like a plot of land, property or gold, etc. It holds the potential to come to the rescue whenever you are in immediate need of funds. Personal loans give access to funds to manage travel expenses, wedding, education, home renovation as well as medical emergencies. It significantly contributes to boosting credit score if managed smartly and wisely. However, it is not the only thing that personal loan providers consider to determine your credibility in the beginning. There are a few lenders who grant unsecured personal loans if they successfully meet the criteria like Clix Capital.

Eligibility Criteria to avail a personal loan

If you’re a salaried employee over 25 years of age and under 58, earning a minimum income of Rs 25,000 per month with a total professional experience of at least 12 months, you are eligible to secure a personal loan from Clix Capital.

How to improve your credit score?

It takes quite some time to build up, and usually, anywhere between 18 to 36 months to acquire a satisfactory or a good credit score. When you exhibit responsible credit behaviour, it makes financial lenders more confident while evaluating your application for a personal loan or any other form of credit. Moreover, with the advent of technology & availability of multiple bureaus, it has become effortless to check credit scores online.

Here are a few ways of how personal loans improve credit score:

It contributes to a better credit mix

Opting for a different type of credit helps boost credit score. A personal loan is a customised instalment loan. If most of your credit is revolving care like credit cards, a personal loan will help enhance your credit mix.

It helps build a payment history

Personal loans are usually smaller amounts as compared to other loans. However, it varies from person to person. Making your personal loan payments on time will help you establish a positive payment history which will eventually increase your credit score. Hence, the key here is to ensure that loan instalments are paid on time every month.

It ensures reduced credit utilisation ratio

Credit utilisation ratio measures how much of your revolving credit is available with you. A personal loan can be used to pay off revolving credit or any debt to improve credit score by replacing revolving debt with a regular installment loan.

In recent times, an increased number of consumers are opting for personal loans to make their purchases as it helps boost the credit score. Also, it doesn’t strain your personal cash flow as it converts your purchases into small EMIs to avoid burning a massive hole in the pocket. Many NBFCs provide personal loans for different purposes, and one such name is Clix Capital.

In the present case scenario, there are multiple ways to build a good credit score. Though, it is essential to put good credit practices into exercise and to opt for an unsecured personal loan as it lends a helping hand to improve credit score when managed smartly.