Our credit score is a very important aspect of getting any loan. However, this same score also gets affected when we take a personal loan. Depending on your credit profile, there are advantages as well as disadvantages of taking a personal loan for your credit score. Let’s see an in-depth analysis of these impacts:
The Positive Impacts on Credit Score:
- Adds Variations to Your Credit Type:
Credit variations are one of the five determinants of your credit score. Although its count is only 10% in this determinant list still, it affects your credit score positively. The meaning of credit variations is: having credit from various sources and types. Taking a personal loan would add one variation into your credit profile; which is good for your credit score.
- Decreases your Credit Utilisation Ratio:
The credit utilization ratio is a ratio of how much you owe on all your accounts like your various credit cards and your total available credit. A personal loan is an installment based loan due to which this debt is not considered at the time of calculating your credit utilization ratio. If you use a personal loan to clear your revolving debts, then your credit utilization ratio will be decreased; which is a good thing for your credit score.
- Consolidate your Debt:
Taking a personal loan can be helpful in debt consolidation. It means that you can pay down balances of your credit cards by taking this loan. People do this to save their money because the interest rates applied on credit cards are higher than the interest rates of a personal loan. As we all know, clearing off debts is a good way of improving the credit score so; your credit score would be improved by doing so.
- Helps in Establishing a Good Payment History:
A personal loan gives you a chance to maintain your payment history in a good way. You can use this opportunity to increase your credit score by repaying your loan installments timely. By doing so, you won’t face any problem if you would need any debt in the future.
The Negative Impacts on Credit Score:
- Increase Number of Inquiries on your Credit Report:
Every time you apply for a personal loan, the lender bank raises an inquiry to the credit bureau to check your credit score. A personal loan inquiry leaves a hard impact on your credit score. It means that your every personal loan application would leave a negative impact on your credit score. That’s why people are also advised to apply only in a few banks while taking the personal loan.
- Increase your Debt:
Although, a personal loan can simplify and consolidate your debts, in a way, it’s also a debt. Any additional debt can affect your credit score negatively so; taking a personal loan is not the solution every time.
After all the discussions, we reached the conclusion that taking a personal loan can be more advantageous and less disadvantageous for your credit score.