As surprising as it may sound, taking a personal loan can help you improve your credit score. You might be wondering how can that be possible since typically loans increase debt. For starters, a personal loan is an installment loan. This means that the loan will not affect your credit score like the debt that one might have on a credit card. A personal loan can help decrease debt quicker and it makes more credit available to you. So, it becomes a viable option for establishing your credibility.
What Is A Credit Score?
Therefore, it boils down to one simple question first. What is a credit score and how personal loans affect it? Credit scores are nothing but a measure of your creditworthiness. Are you worthy of getting a loan in the first place? Your credit score is available to all financial institutions so that they can decide whether you should get a loan or not. Your past credit information will help them make this decision. So, in a nutshell, your credit score reveals whether you will be able to pay your debts or not. For example, someone with a low credit score will be denied loans or credits. This is because their score reveals that they are not financially trustworthy.
What Is A Personal Loan?
A personal loan is usually an unsecured loan with fixed or variable interest rates. It can help you consolidate your debts. You can apply for personal loans in India at every bank and financial institution. The reason why a personal loan is desirable is because it is unsecured. By unsecured, it means that there is no collateral attached to the loan. The lender’s risk is at a maximum due to this. Hence, the interest rates on personal loans are higher than usual.
However, the reason why a personal loan triumphs over credit cards is that the interest rates on the latter are much higher. Hence, it becomes even more difficult to settle the debt. Usually, credit card debt means that the credit limit is at its end. Now, that is not a good thing especially if your aim is to have a good credit score.
How Can Personal Loans Cut Down Your Credit Card Debt?
Most bad credit scores have one thing in common: credit card debt. So, in order to have a good credit score, you should keep one thing in mind: keep credit card debts at bay. If you compare credit card interest rates with that of a personal loan, you will see that the rates of the latter are lower.
If you have existing credit card debt, don’t panic. The first thing that you should do, is not to settle for a credit card loan. If your existing credit score is strong then take advantage of it and apply for a personal loan. Don’t let it slide by opting for more credit card debt.
A strong credit score will allow you to obtain a personal loan at a lower interest rate. Now, you need to figure out the term of the loan. Choose a repayment period that you are comfortable with. A shorter repayment period means that you have to pay lower interest costs but the installments will be bigger. Regardless, it will be easier to tackle a personal loan compared to a credit card loan.
Improving Your Credit Score With A Personal Loan
Financial institutions always evaluate the relationship between your credit limit and your spending habit in a month. This is also known as credit utilization. If this is high, then you are considered a higher risk. What you need to understand is that once your credit score goes bad, it’s hard to pull it back. That does not necessarily mean that people are unable to transform their bad credit score into a good one. But, since it is a difficult process, it is advisable that you take care of your credit score before it goes bad.
Your aim should be to reduce your balance as much as possible before the closing date every month. This will help you improve your credit score. Of course, you can inculcate good habits like setting up automated alerts, making multiple payments throughout the month, etc. but taking a personal loan will help you immensely. It will consolidate your debt and in turn improve your credit score. You have nothing to lose when you opt for such a loan. Replacing your credit card debt with a personal loan can be a wise move especially if you are trying to build a good credit score.
Swapping your credit card debt with a personal loan will lower your credit utilization and diversify your debt. It will also carry a fixed repayment term that you can plan out and track easily. More importantly, you can avoid a credit card debt if you opt for personal loans in real life emergencies. For example, if you are facing a medical crisis, it might not be possible for you to pay the entire amount upfront. Instead of using the credit limit on your credit card, opt for a personal loan. You can even qualify for a higher loan amount than a credit card and will be able to solve the issue at hand.
So, to sum it up, a personal loan will help you disperse your debt. It’s a tool for the smart borrower in you. You go debt-free and at the same time build a good credit score. So, what are you waiting for? Apply for a personal loan from over 20 banks right here!