Home / Brand Stories / How does a loan affect your credit score? Top positive and negative impacts
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Unsecured loans are a great way to get quick financing during a cash crunch. But it is important to keep in mind that your current borrowing decisions don't just affect your credit health today but also your financial wellbeing tomorrow. So, it is important to plan and manage your borrowings wisely. A great way to make a smart borrowing decision is to be aware of your current financial standing by doing a CIBIL score check. Free provisions to do such checks are available online offering convenience and ease.

When you borrow wisely, you not only get the financing you need but also improve your credit score, making it easy to avail credit in future. On the other hand, if you are unable to manage your current borrowings, you strain your current financial situation as well as your future potential of getting a loan. To get better insights 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 avail and can help you build a good credit history. Your repayment behaviour is among the major factors that affect your credit score. Timely repayment shows a sense of good financial responsibility and reduces the risk you pose in your credit profile. This is why repaying your dues in time and in full boosts your creditworthiness and your credit score.

Other than building credit history, unsecured loans can help you lower your debt-to-income ratio and thus improve your credit score. This is because unsecured loans can be availed for various reasons and do not have end-use restrictions. One of their uses is consolidation of existing debt. If you have availed an unsecured loan to do so, it can reduce your total monthly repayment amount, keeping your debt-to-income ratio at an ideal level. This further helps in improving your credit score.

Apart from the above, unsecured loans can also diversify your experience with credit, as have a good mix of credit on your profile also increases your credit score. Lenders are less hesitant to approve applications of those borrowers who have experience in both secured and unsecured credit.

An important thing to keep in mind about the positive impacts of a loan on your credit score if that these are seen only if you plan your borrowing decisions efficiently. To see the impact on your credit score, conduct 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

Availability of an unsecured loan can have a negative impact on your credit health too. These stems from things like failing to make timely repayment. When you do not pay your monthly dues on time or in full, it implies that you may not have a good handle on your finances. Poor repayment behaviour for the loan you avail can cause a dip in our score.

Another way a loan can have a negative impact on credit score is if it extends your debt-to-income ratio beyond the ideal limit. Ideally, you should keep your debt-to-income ratio at 30%. For example, if you have a monthly income of Rs. 1,00,000 and your current monthly EMIs amount to Rs. 25,000, availing a loan with an EMI amount of more than Rs. 5000 takes your total EMI amount beyond Rs. 30,000 and can be harmful for your credit score.

You can sidestep these negative impacts by monitoring your credit health through regular CIBIL score check. Free credit score checking services also come with a credit report that gives you an overview of your financial standing, including the debt-to-income ratio and delayed payments. Reviewing this before availing a loan can help you make informed decisions.

Now that you are aware about the positive and negative impacts of a loan on your credit score, make sure you plan loans accordingly. Proper planning can even help you avail a personal loan for CIBIL score of 550 and help improve your credit score. To avail CIBIL score check free services, you can visit the official CIBIL site or a lender’s website. Monitoring your credit score can give you great insights about what is good and what works against your score.

Bajaj Finserv is among the leading lenders offering not just credit facilities, but also free CIBIL score check services. On the website, you can do a CIBIL score check free of cost by putting in 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 have journalistic/editorial involvement of Hindustan Times. Hindustan Times does not endorse/subscribe to the content(s) of the article/advertisement and/or view(s) expressed herein. Hindustan Times shall not in any manner, be responsible and/or liable in any manner whatsoever for all that is stated in the article and/or also with regard to the view(s), opinion(s), announcement(s), declaration(s), affirmation(s) etc., stated/featured in the same.

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