Can personal loans affect your credit score?

Have you ever get hit by any kind of unexpected expense?

Does your credit card balance have gone out of your hand?

A personal loan is a choice for many to pay all significant expenses even when you don’t have cash. There is numerous poor credit financing offers available in the market that one should consider while applying for a personal loan. However, it has been seen that personal loans might impact the credit score in either a positive or negative manner. Find out how it generally affects the credit score.

The positive effect of personal loan on credit score

There are various ways by which personal loans help improve the credit score.

  1. Contributing to good credit mix

The credit mix can be increased if the credit generally revolves around the credit.

  1. Required for building a payment history

Paying the personal loan instalment is required for establishing a positive payment history for enhancing the credit score.

  1. Minimizing the credit utilization ratio

The credit utilization ratio is defined as a way of measuring how much revolving credit is available to use. If you are paying the revolving credit like credit card debt, it can help improve the CIBIL score.

The negative effect of personal loan on credit score

Mind that the personal loans also show downsides that one must be aware of.

  1. Inquiry on your credit report

When someone is applying for a loan, including a personal loan, the lenders usually do a mandatory credit check. This might leads to a hard inquiry on your credit report. And, it further results in a bad credit score.

  1. Falling you deeper in debt

The chances of this are minimal, but true at the same time. If the borrower use personal loan for paying the higher debt, then he or she has to pay higher interest.

  1. Paying additional fees

Yes, you read it right. Along with interest, you have to pay certain loan costs like late fees or origination fees. Hence, you must first understand all kinds of fees and then apply for a loan.

In the end, it is pretty clear that if you already have a tight budget and can’t make the payments, your credit score is going to suffer. Thereof, one should look out for poor credit financing offers to get the loan.