Financing services are gaining popularity at a rapid speed. The main thing that borrowers usually focus on is getting the lowest personal loan interest rates. However, there is another aspect that usually goes unnoticed when opting for finance. Did you know there are times when a personal loan would affect a borrower’s credit score? Maybe not!
Personal loan credit score effects can overall decrease or increase your rating. Although most of the time a personal loan and its timely repayment can improve credit score, there may be certain exceptions. With this write-up, we share with you seven reasons why a private loan may give you a good or bad credit score.
1. Credit Inquiry
One of the first reasons why a personal loan credit score issue may occur is due to lenders performing a hard inquiry. Whenever customers apply for a personal loan, lenders conduct an inquiry about their eligibility and repaying capacity. This can lower one’s average credit score by a few points. However, this low score is only temporary.
2. Loan Amount & Term
One of the positive effects on your personal loan credit score can be achieved by adjusting the loan amount and term. A high loan amount relative to your total available credit can impact your score. Moreover, opting for a longer term also showcases your long time commitment. Therefore, if you carefully consider both these factors, you can improve your score significantly.
3. Payment History
Being able to repay all your loans on time is a big deal when it comes to personal loan CIBIL score. If a borrower is late in paying or has missed a payment, then their credit score can take a significant hit. It is essential that a borrower maintains a positive payment history by never missing the due dates. Especially, if they don’t want their score to stoop low.
4. Credit Utilization Ratio
A hassle-free way to ensure that your personal loan credit score improves is by lowering your utilization ratio. Although a personal loan will not directly impact your credit utilization, you can still pay off other debts by opting for private finance. It can even include credit card debts. This reduced utilization will, in return, elevate your credit score.
5. Credit Mix
The lack of credit mix can also be a reason why personal loan CIBIL score is at a substantial low. It is believed that adding various types of financing services under your profile can improve your overall rating. This is because it allows you to diversify your credit profile. However, when a borrower is only opting for personal loans and no other credit facility, it may result in the negative side.
6. Closing an Old Account
This particular reason can have positive and negative effects both on personal loan credit score. In some cases, consolidating your debt with the help of a personal loan can help you shorten your credit history. This can slightly lower your score. However, in other cases, closing additional accounts can also be a wise decision to reduce active debts.
7. Defaulting a Loan
The last on our list of why you may have a negative personal loan credit score is if you default. Whenever a borrower fails to repay the loan or settles for a lesser amount paid, it can have serious consequences for the credit rating. This can also be a part of your credit report for years, making it difficult to get finance in the future.
Learning about the effects of personal loan on CIBIL score is essential, so that you do not have to struggle at the end. Credit ratings can impact everything from loan eligibility and approval speed to the interest rate. Therefore, identifying the factors that may be positively or negatively affecting your score is a must.