How does a loan affect your credit rating? Main positive and negative impacts

Unsecured loans are a great way to get quick funding in times of cash shortages. But it’s important to keep in mind that your current borrowing decisions affect not only your credit health today, but also your financial well-being tomorrow. It is therefore important to plan and manage your borrowings wisely. A great way to make a smart borrowing decision is to know your current financial situation by doing a CIBIL score check. Free arrangements for performing these checks are available online, providing convenience and ease.

When you borrow wisely, you not only get the financing you need, but you also improve your credit score, making it easier to access credit in the future. On the other hand, if you are unable to manage your current borrowings, you are putting a strain on your current financial situation as well as your future potential for obtaining a loan. For better information on how a loan can affect your credit score, read on.

Positive impact of a loan on your credit score

Unsecured loans are easy to get and can help you establish a good credit history. Your repayment behavior is one of the main factors that affect your credit score. Timely repayment shows a sense of good financial responsibility and reduces the risk you pose to your credit profile. That’s why paying off your dues on time and in full improves your creditworthiness and credit score.

Besides building a credit history, unsecured loans can help you lower your debt-to-equity ratio and thus improve your credit score. Indeed, unsecured loans can be used for various purposes and have no end use restrictions. One of their uses is the consolidation of existing debt. If you’ve used an unsecured loan to do this, it can reduce your total monthly repayment amount, keeping your debt-to-income ratio at an ideal level. This further helps improve your credit score.

Besides the above, unsecured loans can also diversify your credit experience because a good credit mix on your profile also boosts your credit score. Lenders are less reluctant to approve applications from borrowers who have experience with secured and unsecured credit.

One important thing to keep in mind about the positive impacts of a loan on your credit score if these are only seen if you plan your borrowing decisions effectively. To see the impact on your credit score, perform a CIBIL score check. Free services offered by lenders and credit rating agencies can give you easy access to your credit score and report.

Negative impact of a loan on your credit score

The availability of an unsecured loan can also have a negative impact on your credit health. These stem from things like not making timely repayments. When you don’t pay your monthly dues on time or in full, it means you may not be in control of your finances. Poor behavior in repaying the loan you benefit from may cause our score to drop.

A loan can also have a negative impact on credit rating if it extends your debt-to-equity ratio beyond the ideal limit. Ideally, you should maintain your debt ratio at 30%. For example, if you have a monthly income of Rs. 1,00,000 and your current monthly EMI amounts to Rs. 25,000, availing a loan of an EMI amount greater than Rs. EMI beyond Rs. 30,000 and can hurt your credit score.

You can avoid these negative impacts by monitoring your credit health through regular CIBIL score checks. Free credit score check services also come with a credit report that gives you an overview of your financial situation, including debt-to-income ratio and late payments. Considering this before you qualify for a loan can help you make informed decisions.

Now that you know the positive and negative impacts of a loan on your credit score, be sure to plan your loans accordingly. Proper planning can even help you qualify for a personal loan for a CIBIL score of 550 and improve your credit score. To avail the free CIBIL score verification services, you can visit CIBIL official website or a lender’s website. Tracking your credit score can give you great insight into what’s good and what’s working against your score.

Bajaj Finserv is one of the leading lenders offering not only credit facilities but also free CIBIL score verification services. On the website, you can perform a CIBIL score check for free by putting some basic information and get results in just a few minutes. Check your CIBIL score today and understand your credit health to make smarter decisions.

Disclaimer: This article is a paid publication and does not involve any journalistic/editorial involvement of the Hindustan Times. Hindustan Times does not endorse/endorse the content(s) of the article/advertisement and/or opinions expressed herein. Hindustan Times shall not be in any way responsible and/or liable in any way whatsoever for anything stated in the article and/or also with respect to the view(s), opinion(s) ), announcement(s), statement(s), affirmation(s) etc., stated/presented in the same.

Catch all the trade news, market news, breaking news and latest updates on Live Mint. Download the Mint News app to get daily market updates.

More less

To subscribe to Mint Bulletins

* Enter a valid email

* Thank you for subscribing to our newsletter.

Post your comment