How a Personal Loan Can Have a Positive Impact on Your Credit Score?

 A personal loan is an unsecured loan, and it does not require collateral. The best thing about this loan is that it does not have any restrictions on the purpose. Accordingly, it can be used for any purpose according to your wish. You can use it for medical emergencies, for educational purposes, for holidaying, purchasing gadgets, and so on. Like other loans, the money borrowed has to be paid back over a fixed period of time in equated monthly installments (EMIs). It is convenient and easy to get a personal loan, and hence it is becoming very popular. Let us now read on to understand how a personal loan can have a positive impact on your credit score. 

What Is The Importance Of A Credit Score? 

A credit score is a 3 digit numerical score that represents your creditworthiness. A higher credit score indicates that you have made your repayments on time and have handled your credit well with financial discipline. Thus, when your credit score is high, potential lenders will be ready to lend to you. The credit score is a crucial factor for lenders to determine if a loan should be sanctioned. In many cases, even the interest rate to be charged to a prospective borrower is determined based on this score. All the 4 credit bureaus in India provide a credit score between 300-900. 900 is the highest and considered an excellent credit score. A credit score of 700 and above is considered ideal. The credit score is computed based on the information from your credit history that includes your repayment history, the total amount owed, the length of the credit history, credit mix, and the most recent credit inquiries. A credit score in the range of 700 to 750 is considered fair, and depending on the type of loan you need, you may get it. A credit score less than 700 is considered poor and is likely to result in loan refusal. A score of over 750 is considered to be a good score and will give you the power to negotiate with the lender for a lower interest rate. Essentially, the higher your credit score is, you will have access to more credit, lower interest rates, and flexible loan terms and conditions. If you have a poor credit score, you will find it difficult to obtain a higher loan amount. Hence, having a good credit score is paramount to get affordable loans in the future. 

Why Should You Take A Personal Loan To Improve Your Credit Score? 

Improves Your Credit Mix: 

Taking a personal loan can improve your credit mix. Your credit mix refers to the different types of credit accounts you have including credit cards, secured loans, unsecured loans, etc. It makes up about 10% of your credit score. While it’s not essential to have one in each type of account, having different types of accounts can indicate to lenders that you have the capability to manage multiple kinds of credit. There is a higher probability that lending institutions will see you as a more creditworthy borrower when you apply for a new form of credit like a home loan or a car loan. But, at the same time, you should ensure that you have not taken on too much debt. 

It Helps In Reducing The Ratio of Credit Utilization:

This is an important factor based on which the credit score is calculated. Personal loan online or offline helps in reducing the credit utilization ratio. Credit utilization ratio is nothing but the ratio of the total revolving credit that you are using to the total amount of revolving credit available. 

It helps in consolidating your debt obligations: 

To consolidate your existing debt obligations, you can take a single personal loan. This will decrease the amount of interest you have to pay on your debt and ensure that you repay your personal loan in an organized manner through your EMIs. With respect to credit score computation, this will reduce the probability of defaulting on EMIs, as you will be paying only one EMI for the personal loan instead of multiple smaller personal loans. 

Helps improve your credit score by aiding timely repayments: 

Whenever you apply for a loan, you will pay it back in EMIs. These are determined by the lending institution according to your repayment capability. Thus, you can repay your installments on time, and this will help you improve your credit score. 

What Are The Things You Should Keep In Mind When Applying For A Personal Loan So That You Can Improve Your Credit Score?

Do not apply for multiple loans: 

When you apply for multiple loans, lenders will see you as hungry for credit. Also, when you apply for a loan, a hard enquiry will be initiated on your credit report. This will impact your credit score.  

Make timely and regular payments: 

There is no point in taking a personal loan for credit improvement if you are going to default on your EMIs. So, make sure that you make timely and regular payments.

Determine the loan amount that you need: 

It is always important to assess the amount of loan that you need. Especially, when you are taking a loan to improve your credit score, you need to decide the amount of loan that you are going to opt for. 

Prepaying your loan is not  advisable: 

When you have taken a loan to improve your credit score, do not pay it completely until the loan matures. Keep paying EMIs regularly. In this way, you will be able to build your credit score because paying regularly over a longer tenure will improve your credit score. 

Do not get tempted by various offers: 

When you start paying your monthly EMIs regularly, your credit score will improve. This will make you eligible for various types of loans. But, do not rush to these offers, since they can be detrimental to your credit score. 

Do not pre close your loan: 

The lender will take your short-term and long-term creditworthiness into account. So, even if you have the money to close your loan before the loan period ends, ensure to pay a lump sum and do not close it.


Thus, taking a personal loan will help in improving your credit score. The above points will help you understand how a personal loan can have a positive impact on your credit score. But, you must remember to keep certain essential things in mind and handle your credit carefully. Then only will taking a personal loan be effective in improving your credit score.