Do Personal Loans Affect Your Credit Score
We all would have taken loans sometime, or there may come some situations in the future where you need personal loans to compensate for the expenses. But do you know loans may affect your credit score? Yes, Loans do affect your credit score.
Taking personal loans or any loan may positively and negatively affect the credit scores concerning many factors. Taking a personal loan is not bad, but it can give you a tough time by affecting your credit scores if you apply for loans frequently. Further in this article, let’s see how personal loans affect credit scores and the connection between personal loans and credit scores.
Credit Score
First, let’s know what a credit score is to know the consequences and connection between loans and credit scores. Credit bureaus like CIBIL are responsible for calculating the credit score of the customer and credit card users in India.
A 3-digit credit score ranges from 300 to 900, and it is measured through the credit reports of the customer/company. If one wants to get a personal loan in India, one must have a decent credit score between 700 and 720; more than this is very appreciable.
If you have repaid loans by delaying, you may have to worry about your credit scores. Delaying will negatively affect your credit scores, which might lead to a tough situation while getting a personal loan in the future. Credit bureaus consider many factors for credit scores. Some of the most critical factors are,
- 35% – based on your payment history
- 30% – based on the total amount of your outstanding debt
- 15% – based on the length of your credit history
- 10% – based on any new debt
- 10% – based on credit mix
Personal Loan and Credit Score
A personal loan is considered a better option than using your credit cards, as credit rating matters most for credit scores. Because taking personal loans either offline or online helps decrease credit utilization which is an important factor for credit bureaus while calculating your credit scores, as mentioned above.
The other factors like credit history length and credit mix are also affected by the personal loans most of the time. Taking personal loans may positively affect your credit score in most cases. It may cover up to 90% of the factors eligibility mentioned above, which credit bureaus use to calculate credit scores.
Anyway, the type of loan will not matter for the credit bureaus when you repay the personal loan on time. One of the most important factors mentioned above, credit history will improve when you use loans instead of credit.
Did you know: A higher credit score means a lower personal loan interest rate.
New Credit and Personal Loans
While calculating your credit scores, new credit is also one of the most important credit bureaus. Each time you apply for a new loan, your credit score will reduce according to the loan you’ve taken. It’s why one is advised not to apply for many loans at different loan lenders within a shorter duration of time.
However, this will reduce the credit score minimally and only for some time until you repay the loan. It may not affect your credit score or personal loan eligibility in the longer run. As soon as you start repaying the personal loan on time, lenders will neglect the reduced credit score, and you can again start to improve your credit scores by considering the factors mentioned above.
Conclusion
Credit scores do matter, but that does not mean that you should not use a credit card or take loans in a shorter duration because who might know when they might need additional financial support for their expenses. But it is recommended to take loans instead of credit cards and that too not frequently to maintain their respective credit scores.
However, remember that credit scores improve with time, so don’t worry if you can use credit cards or take personal loans or any loans in a shorter duration.
Eligibility criteria for taking loans and calculating credit scores may differ slightly in some banks; not many differences you can see, but some may vary. So it is better to look around your area for well reputable banks and ask them about their policies and conditions.
Choosing a bank should also be done wisely to have a good banking experience and ask suggestions from friends or neighbours for good trustable banks around you. I hope this article has helped you know how personal loans affect your credit scores in good and bad ways.
