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How to improve Credit with Personal Loans

A good credit score is a very important aspect of your credit, however maintaining so is not a very easy task. It may be slightly hard to believe that a personal loan can help you a great deal in improving your credit. Even though a personal loan implies more debt and may seem to be negatively impacting your credit. However, it can good for you if you use personal loans to restructure your debt.

Getting a good mix of credit helps you keep a healthy credit score, but you should not go overboard with too many types of credit. As in the case of personal loans, you are required to make a fixed monthly payment. The pre-determined monthly payment includes interest plus a part of the principle. Sometimes a personal loan at a lower interest rate can help you pay off credit cards debt with high interest rates.

Using Personal Loan to your Advantage

It is very tempting to spend the newly acquired credit through personal loans, but doing so will only negate your purpose of improving credit.

  • The best way to use the acquired fund is to pay off credit card debts, if any. However when you pay off your credit card, it is advisable not to cancel the cards and retain them to continue to benefit from your credit.
  • Apart from this, if you continue to make payments on time for six months to a year, there is a possibility that you can get your loan refinanced at a much lower rate of interest.
  • A personal loan also improves your available credit to debit ratio. Also referred to as the ‘utilisation ratio’ is responsible for 30% of your credit score.
  • A personal loan can help create a good mix of your credit and help you gain a good credit score.
  • Personal loans can also help in lowering your debt faster as you can choose shorter loan tenures.

The most important step in securing a personal loan is to find one with the best interest rate as there are many lenders and banks available offering a wide variety of rates. However, multiple applications to multiple lenders may reflect badly as it may be a sign that you want to take on a large debt.

Remember, there is a downside to this technique of credit repair if you do not make decisions carefully. In the initial phase, when you take a new loan, there may be a fall in your credit score as a new loan signifies additional risk. You should keep in mind to make timely payments always and avoid opening any other new account.

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