In India, there are only four credit bureaus that calculate your credit score. One of the most reputed and popular credit bureaus is Credit Information Bureau (India) Limited also known as CIBIL. The credit score calculated by CIBIL is called the CIBIL score.
Availing of easy loans like personal loans can make or break your credit score but before understanding the effects of a personal loan on your credit score, you need to know its aspects.
Credit score factors
Payment history:
Payment history is the most essential factor in credit rating, and even a single missed payment can lower your score. When assessing you for new credit, lenders want to know that you will pay back your debts on schedule. Your payment history makes up about 35% of your credit score.
Credit utilization:
Credit utilization makes up 30% of your credit score and is measured by your credit utilisation ratio. Divide the entire revolving credit you’re presently utilising by the sum of all your outstanding credit limits to get your credit usage ratio. This ratio shows how much of your available credit you’re using and might show you how reliant on non-cash finances you are. It is recommended to keep your credit utilization under 30% because anything more than that is seen as a red flag by lenders.
Credit history length:
The length of time you’ve had credit accounts makes up 15% of your Credit Score. It includes the average age of all your accounts, the age of your oldest credit account, and the age of your newest credit account. Longer credit history has a positive impact on your credit score.
Credit mix:
Having diverse credit accounts, like car loans, credit cards, student loans etc can increase your credit score as it shows how well you can handle different credit products. Credit mix makes up for 10% of your credit score.
Hard Inquiry:
Every time you apply for a new credit account, the lenders perform a hard inquiry by pulling up your credit report to determine your creditworthiness. Hard inquiries lower your credit score and make up for 10% of it.
Positive effects of a personal loan on your credit score.
Opportunity for timely payment: Taking out a quick loan online gives you the chance to increase your credit score and have a positive payment history by making on-time payments.
Reduces credit utilisation: You can use an easy loan i.e a lower interest loan as a consolidation loan to pay off your higher-interest credit card balance. By doing so, not only will you reduce your credit utilization but also save on the interest added to your credit card balance.
Helps your credit mix: Lenders prefer candidates who are responsible for different types of credit products. So for e.g, if you have revolving credit like a credit card, getting an instalment based personal loan can increase your credit mix.
The negative effects of a personal loan on your credit score.
Applying for multiple personal loans: Applying for multiple quick loans online damages your credit score as all of these lenders will perform a hard inquiry on your credit report, dragging down your credit score. Before applying for a personal loan, check if you’re meeting the eligibility criteria of the lender as having personal loan rejections can also reduce your credit score and your chances of approval for loans.
Reduces the credit history length: If you have existing loans or credit accounts, adding a new personal loan can bring down the length of your credit history average. E.g., if you have one credit card on your credit report for 10 years that makes your credit history average 10 yrs. If you add a personal loan will reduce your credit history average to 5 yrs.
Missed payments: Having missed payments negatively impact your credit history and make you undesirable in the eyes of a lender.
