New Delhi: A good credit score opens numerous options for getting personal loans with attractive features, such as low interest rates. However, credit scores differ between individuals, and the only avenue of enhancing one’s chances of receiving a reasonable personal loan is improving the credit score.
On the list of strategies for a credit score boost, Small Personal Loans can be helpful. It was noted that applying for a small personal unsecured loan can increase your credit score. Discover the info on Small Personal Loans in this post and how to leverage them to improve credit scores.
What is a Credit Score?
A credit score is a numerical value ranging from 300 to 850; creditors rely on it to determine your creditworthiness. It is typically between 300 and 900. How well you’ve paid your bills, how much credit you use, the sorts of credit you have, how long you’ve had credit, and any new credit accounts you’ve started affect this score.
Lending institutions use your credit score to determine your risk and what conditions and interest rates fit your application.
Understanding Small Personal Loans
A Small Personal Loan is a form of credit that individuals can access without providing any form of collateral for any personal purpose. Typically, they are available at fixed interest rates and repayment periods, which helps make these loans standard. These loans seem to provide a small amount of money to meet a small lifestyle need, like purchasing a phone or travelling.
Impact of Small Personal Loans on Credit Scores
1) Bill Payments
How well you’ve paid your payments affects your credit score. A good credit score builds over time, and on-time payments boost it. For example, borrowing small amounts and paying them back on time boosts your credit score. Because lending institutions regard this as proof of bill repayment, this reflects well on your credit history.
2) Credit Mix Diversification
A credit mix comprises mortgages, credit cards, and loans like Small Personal Loans. Lending institutions notice that you can handle multiple credit types. Get a Small Personal Loan and treat it like other credit to boost your score.
For example, you can see personal loan EMI repayment as another credit card repayment. Consider switching on the auto-debit feature in the app from where you took the loan. Or, you could set aside 3 months of EMIs in advance to ensure you don’t spend this EMI amount to fund any other lifestyle expenses.
3) Improving Credit Utilisation Ratio
A personal instant loan without CIBIL differs from another funding option, such as a line of credit. Unlike in the latter, where the lending institution can see how much credit you can use, Small Personal Loans don’t matter. Once you’ve received the funds, all that matters is the timely repayments.
Moreover, if you borrow money (such as a Small Personal Loan) to settle your credit card debt(s), your overall credit utilisation ratio will decrease, which could be good for your credit score.
Take out a single personal loan with enough funds to pay off all of your credit card accounts at once. This will lower your total usage ratio, ultimately boosting your credit score.
4) Credit history duration
Your credit score is determined by the duration of your credit history. The theory explains that people secure a better credit score each time they apply for Small Personal Loans and promptly repay them.
Also, a three-year credit history proves to lending institutions that the credit is being managed responsibly for a prolonged period of time.
5) Credit Inquiries
Your credit score may be affected if you inquire about your credit score often. That’s why if you get a Small Personal Loan, it will most likely mean you’ll focus more on EMI payments and attending to the needs for which you took the loan rather than inquiring about your credit score.
Small Personal Loans: How to Approach Them?
1) Financially assess your needs
Assess your budget and decide how much of a personal loan you need before applying for one. As a rule of thumb, refrain from applying for more than you need, even if you’re eligible for that extended loan amount. It would help to consider how much you can pay back each month and then decide on a number. Why do you need the money? This will help you choose the loan amount that suits your needs.
2) Compare lending institutions and terms
Compare multiple lending institutions’ personal loan terms and rates to find the best deal. Look at APR (Annual Percentage Rate), repayment periods, and any hidden costs before deciding.
To manage lending institution-related risks such as shut-downs in the future or the lending institution accounts getting hacked, choose a lending institution with a solid reputation that the RBI backs them. Also, look for lending institutions with low rates and flexible repayment options to ease your repayments.
3) Pay EMIs on time
Personal loans require monthly on-time payments. To ensure you repay your EMIs on time, consider setting up automatic payments or alerts to never miss a payment. Late payments affect the credit score.
Moreover, making payments on time at all times shows that you are serious about paying back your loans.
4) Take out what’s only needed
Personal loans can assist in building your credit, but it’s best to use them sparingly. Pay attention to how much you borrow, mainly to fund important expenses such as an important purchase or to clear high-interest debts.
Also, Keep your debt-to-income ratio in check.
Conclusion
A Small Personal Loan can boost your credit score significantly, provided you know how to use it. You can improve your credit score by paying your Small Personal Loan EMIs on time and being responsible when repaying.
Also, understand why you need a loan, research lending institutions, and choose an instant loan without CIBIL that meets your fund requirements.
