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

A short-term loan, whether a gold loan or a personal loan or even an unsecured business loan, can often prove useful in case a person needs cash to meet any immediate requirements. These could include paying for children’s education, going on a vacation, buying consumer appliances or renovating the house during the festive season. But a short-term loan can also help an individual improve their CIBIL score, which are known as credit scores in general.

The CIBIL score is a scoring system used for assessing credit history of an individual or an entity. The score is used by lenders to assess the creditworthiness of a potential borrower.

The CIBIL score ranges from 300 to 900 and the closer the score is to 900, the higher the chances of the lender approving the loan. The score is generated by a scoring algorithm which takes into account a number of factors including payment history, credit utilization, number of applications for loans and credit mix.

Improving The CIBIL score

Having no loan does not mean you will get a good CIBIL score. In fact, if you have not taken any loan, you will have no credit history and the CIBIL score will throw up a ‘No Hit’, meaning there is no credit history to generate a score. A ‘No Hit’ is as good as a poor score because it won’t help you to get loan from a lender at attractive terms.

A short-term loan will help a new borrower to build a credit history. It will improve the CIBIL score, provided dues are paid on time on the loan. This is because when an individual takes a short-term loan and pays dues on time it creates a credit history and improves the credit score. However, if the loan dues are not paid on time or there is a default, it will have a negative impact on the CIBIL score.

A credit card will also serve the same purpose. But to improve the credit score, one has to be extremely prudent in using a credit card and ensure that there is no outstanding amount on the card.

Paying only minimum dues on a credit card may be easier on the pocket in the short run, but it will lower your credit score. The minimum amount due is not exactly paying dues on time, it is only paying the least amount the credit card issuer will accept toward the outstanding debt. Paying only the minimum amount due will increase one’s credit utilization ratio—the ratio of total credit used to total credit available. This, in turn, will lower the credit score.

Short-term loans can also be used for consolidating existing debt like the outstanding on credit cards. Consolidating the outstanding amounts on credit cards with personal loans is a good option as it will save one money and improve the credit score. This is because interest rates on short-term loans are usually lower than credit cards.

Tips To Improve CIBIL Score

The best way to improve the CIBIL score is to maintain a good credit history. Here are some pointers to improve one’s credit score:

• Pay Dues On Time:

Late payment or partial payment will reduce the CIBIL score.

• Credit Utilisation:

Be prudent in using credit and keep credit utilisation low.

• Apply For Loans In Moderation:

Applying for too many loans will throw up warning signals. Every time a bank or an NBFC asks for a hard query—a request to the credit bureau to see a potential borrower's credit file—it negatively impacts the credit score.

• Healthy Credit Mix:

Always maintain a healthy mix of secured (home loan, car loan) and unsecured loans (personal loan, credit cards). Too much dependence on unsecured loans is considered negative by credit bureaus.

• Monitor Guarantees:

If you have stood guarantee for a loan or are a co-signatory for a loan, you will be equally liable for delayed payments.

Conclusion

A short-term loan will help to build a credit history in addition to meeting your immediate financial needs. If used wisely, it will help to improve your CIBIL score.

With the growing use of digital technologies, taking out a short-term loan is easier than ever. IIFL Finance, for instance, offers short-term personal loans as well as gold loans and unsecured business loans at attractive interest rates through hassle-free online processes. IIFL Finance also provides borrowers greater flexibility and customized repayment options. This helps borrowers avoid burdening their finances and also improve their CIBIL score.