Financial experts in Singapore have argued that personal loans raise credit scores for borrowers. However, have you ever asked yourself how this is possible? The TransUnion did a study on a finance company in 2019 and found that 68% of the people who, in one way or another, applied for a personal loan increased their credit score by 20 points within the three months of paying their mortgage. The study also found that, towards the end of their loan repayment period, their credit score further increased to between 77% and 84%.
If you’re asking why, here are 4 tips to improve your credit score with a personal loan.
1. Shoot Down Your Credit Utilisation
The amount you owe for the debt consolidation loan plays a vital role in determining your credit score. FICO, one of the formulas used in calculating the credit score, lets credit utilisation to account for up to 30% of the total score. Therefore, if the debts on your credit card are paid through a personal loan, your credit card consequently drops to zero. Ensure that your credit card is always open and keep the balance as low as possible. Doing this will surely raise your credit score.
2. Mix Your Credit Utilisation
Another essential catalyst that improves credit score is the credit mix. This component of the FICO contributes around 10% of the total credit score. A perfect example is having a mortgage, auto loan, and a credit card all in one account instead of having three different accounts of the same type. The critical factor here is showing your ability to handle different kinds of loans at a go. Adding a personal fast cash loan can add credit value to a given extent.
3. Revolving Debts Vs. Instalment Debt
Credit bureaus consider revolving any instalment debt when calculating your credit score. Here, they look at your specified monthly payment over the set amount of time. Revolving debts, on the other hand, have a low and flexible monthly payment. While credit cards are revolving debts, personal loans are instalment debts. Looking at that perspective, the score of your liability is higher. Here is a practical example: if your credit card reads $10,000 and your current usage balance is $9,500, that is not a good sign. However, if your loan is $10,000 and you have paid $9500, that is a good sign.
4. Top Up Your Credit Card Before Your Balance Is Reported
Even though you can use your loan for whatever you want, some uses can be harmful to your credit score. A perfect example is obtaining a personal loan to maintain your credit card debt. The score boost is found in a TransUnion survey for consumers who use consolidated credit for other reasons other than paying your credit card. FICO considers that as exchanging a bad form for a good structure which is not always the case when applying for a personal loan.
Even though there are other significant factors, these four are the main contributors to a solid credit score. While this factor cannot increase your credit score overnight, practising them will increase your credit score over time. Get started today and improve your credit score.