Personal loans and credit cards are two financial instruments for building a credit score. While credit cards offer convenience, they carry high interest rates.
Hence, a personal loan is a better option to improve your CIBIL score. Personal loan is an unsecured loan and can go a long way in improving your credit score.
You can improve your CIBIL score with a personal loan by taking the following steps.
Use a Personal Loan for Debt Consolidation
Managing different debts with multiple creditors is a cumbersome task. Each debt will have its due date, charge and mode of payment. In this case, you tend to miss payments, which will incur more interest over time due to higher interest rates. And if you have two or three credit cards, the interest on your outstanding balance will keep on adding up which will hurt your CIBIL score severely.
In this case, you can get a personal loan to consolidate multiple debts into a single, larger piece of debt. With a personal loan, you can pay off all of your credit card dues. With a personal loan, you can pay to various creditors at once and make a single consolidated monthly payment towards your personal loan. In simple words, debt consolidation will help you clear outstanding dues on time in an organized manner. By paying off all your credit card bills on time, you can improve your credit score instantly.
Use a Personal Loan to Repay a High-Interest Loan
If you have loans with a higher interest rate, it will be a smart choice to pay off your high-cost loans with a personal loan with a lower interest rate. A bank in which you have savings account will always be ready to lend you a personal loan at lower rates.
When you clear your high-interest loans with a personal loan at a lower rate, it will decrease the burden on your finances, and thus you can repay your EMIs on time which will improve your credit score.
When you apply for a new personal loan to pay off a high-interest loan, keep the following points in mind.
Do Not Apply for Multiple Loans- Applying for multiple loan applications can hurt your credit score. When you apply personal loan online with multiple lenders, it creates hard inquiry on your credit report. If you are searching for the lowest interest rate, you should use online tools that require a little information about you and shows you multiple offers. You can compare the rates and go for the lowest rate from a lender you qualify with.
Decide the Amount Carefully- If you are applying for a personal loan to improve your CIBI score, you should apply for a loan amount which you can repay easily, not for what you need.
Make Regular Payments– Getting a personal loan for improving your credit score only makes sense if you make payments on time. Make regular payments on or before the due date and never skip an EMI.
Never Go for a Foreclosure: When you get a personal loan to build your credit score, you should not prepay it before the scheduled tenure, because longer repayment history makes a better impression. Hence, your credit score will improve gradually.
A personal loan not only helps you to get out of a financial crisis but is also helpful in building a credit score.