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How A Short-term Loan Can Improve Your CIBIL Score?

Need to make a big purchase like a home or a car? Or want to invest in your kids’ education for a bright future? Taking a loan seems like an easy option if you have a large expense looming over your head.

If only, you have been to a bank with a loan application. A huge list of documents, verifications and attestations and lastly, the credit score.

Getting your loan application rejected on basis of a poor credit score or zero credit history is quite common when it comes to established banks and NBFCs (Non Banking Financial Corporations, such as loan and insurance companies, co-operative banks, stock broking firms, etc.)

Wondering what is a credit score? Then this article is definitely for you. 

Credit Score is a 3-digit number on which all registered loan providers evaluate your capacity to pay the loan on time. In other words, it decides your credit worthiness.

The different Credit Score ranges and their grade is as follows –

Credit Score Ranges
Range          Grade
0 or -1           No Credit History
550 - 300       Bad
551 - 649      Poor
650 - 699      Fair
700 - 749      Good
750 and above     Excellent

Different countries have different credit score rating systems. Popular credit score systems in India include CIBIL and CRIF, which range from 300-900 and 300-850, respectively. In general, the higher your credit score is, the better chances you have of loan approvals. Banks and NBFCs reject loan applications if an applicant has zero or poor credit score. Anybody with a credit score of 750 or more has a high rate of loan approval.

A 0 or -1 signifies that the person has never taken a loan or used credit cards previously. Such loan applicants are considered ‘New To Credit’ and have ‘Zero Credit History’, and are by default denied a loan sanction by big financial establishments. Do you also fall under the same category? Chances are you would be denied a loan if you don’t build or improve your credit score. 

The two common methods of building and improving credit score is by taking a personal loan or using credit cards and paying their dues on time. However, credit cards charge a high interest rate and due to our tendency of swiping the credit card everywhere for all the purchases, people end up getting higher bills than expected. 

Which is why, taking a short-term personal loan makes much more sense. Some online loan providers like PaySense provide a personal loan in a few clicks and the best part is that they serve people with zero credit history as well. 

How a personal loan can help improve CIBIL Score? 
To start building or repairing your CIBIL score, you can use a personal loan and pay all your EMIs on time. It is advisable to use only 30% of your available credit line, so that you can easily afford the EMIs without burdening your pocket. Such small personal loans are easier to pay and help improve your CIBIL score incrementally.

This method of improving your CIBIL Score or any other credit score in small incremental values is also known as 'Snowball Effect'.

For instance, if you have a salary of 20,000 INR per month and have never taken a loan or used a credit card previously, your credit score will be 0 or -1. However, online loan providers like PaySense can offer you an instant personal loan of Rs. 5,000 to 2 lakh; which you have to repay in a duration ranging from 3 months to 24 months.

Let’s assume that you take a loan of 5,000 for 3 months and pay your EMIs regularly on time, your credit score will start increasing. After 3 or 4 such short-term instant personal loans which are easy and affordable to pay, your credit score will improve to 650 and above within an year.

A few precautions while taking a personal loan to improve your credit score – 

Don’t apply for multiple loans simultaneously – since multiple hard enquiries for loans impact your credit score negatively.

Choose your loan amount carefully – use only up to 30% of your available loan amount so that it’s easy to pay off.

Review your loan agreement properly – to check the terms and conditions, fees and penalties, etc.

Pay your EMIs on time – since delayed or missed EMI payments can not only incur penalty charges but also lower your credit score, making you unfit to apply for any other loan in future.

Don’t foreclose your loan – since it would reflect in your detailed credit report and create negative impact on your long-term credit worthiness

Lastly, if you choose wisely, you can start building your credit score today with short-term personal loans and be loan-ready in future for bigger expenses. 

[Note : This post is sponsored by Paysense.]

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