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How Personal Loans Will Improve Your Credit Score?

Personal loan

A personal loan must be utilized responsibly because missing a payment will impact your credit score to a great extent and you may not be able to avail loans in the future. Your credit score suggests how well you are able to manage your finances. Credit score also plays a key role when you apply for a loan as many lenders look if you have a decent credit score of 700 and more to approve you a loan. If you borrow a personal loan and repay within the specified time without missing a payment, your credit score will improve significantly.

Credit Score

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Credit scores vary from 300 to about 850. Lenders such as banks, NBFCs, credit unions, etc., look for your credit score to approve your loan as it indicates your current financial situation. If you manage your personal finances well, your credit score will be high and on the contrary, if you do not manage them well, like missing bill payments, then it will drastically fall. Though there are several factors considered to approve you a loan, and credit score is the major factor that impacts your lender’s decision.

Can personal loans improve your credit score?

Like any other credit, personal loans as well affect your credit score either positively or negatively, depending on how you make your payments. If you are curious to find, how your credit score is affected by personal loans, we have listed a few ways below.

Pay your personal loan promptly

As soon as your loan is approved, set timely reminders to settle the due before the deadline in full. Delaying your payment even for 1 or 2 days may significantly impact your credit score. On the contrary, if you make timely payments, your score will soar high. With a high score, a lender may prefer you without any second thoughts. So, pay your loan promptly to improve your credit score quickly.

Have a low debt-to-income ratio

Debt-to-income ratio is the percentage of your income that goes towards your debts. Before approving you a loan, the lender will check your debt-to-income ratio. If your debt-to-income ratio is greater than 43 percent, chances of loan approval will decrease as many lenders do not approve a loan for a borrower who already has too much of debt.

Don’t ever have a mindset that getting high loan amount will hurt your score. The most damage to your credit score is done when your debt-to-income ratio exceeds the normal percentage. So, do not apply for a personal loan online when you have a higher debt-to-income ratio.

Things to check before choosing a personal loan lender

  • Research and find the best lender who does not levy any hidden charges.
  • Most lenders will impose a penalty for paying the loan early. Make sure there is no prepayment penalty levied for paying off the loan in a full and final settlement.
  • Check if the lender has a simple loan application process with minimal documentation compared to the tedious traditional application process.
  • Make sure your loan repayments are flexible.

Not many lenders will have a flexible repayment plan. NBFCs like FlexSalary give more benefits to borrowers and the borrower will be in control of his payments. As a borrower, you can make minimum or full payment as you wish. So, choose a reputable lender to borrow money so that can you increase your credit score effortlessly.

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