In today’s Lifestyle, a credit score is an important factor that cannot be ignored. The amount you pay on your home mortgage or auto loan is impacted by the credit score. The loan amount that you get from your bank and the interest rate they charged depends upon the credit score. The higher the credit score the higher is the credit available to you and lower the interest charged. To take the best advantage from the lender, improve your credit rating as much as possible.
Check Here: How banks use credit reports
Before we discuss building credit scores with loans, there are some important factors that you have to remember.
- Do not borrow more than you need.
- Do not borrow what you cannot afford to pay back.
- Set up an auto pay option so that you don’t miss payments.
Remember these aspects and follow good credit practices and only then you can build credit score or else you will fall into debt and affect your credit score.
Methods to improve credit score with loan
The most popular and less risky methods are given below.
- Debt Consolidation
- Credit Builder Loan
- Smaller loan
1. Debt Consolidation
Debt Consolidation is the most popular method to overcome debt and it also helps in building credit score. Let us take an example and understand it in detail. Suppose you have three credit cards and you have an outstanding balance on these three cards. Three different cards have different interest rates. When you avail the personal loan it allows you to get money and you can pay off Outstanding balance on three cards. Then make payment for the personal loan with one payment per month.
Since you paid credit card dues and personal loan your credit score may increase.
This is a potential saving method as it helps in saving money for the customer. Personal loans offer lower interest rates than credit cards. With the help of Debt Consolidation you can improve your credit rating by making regular payments and setting balance on your cards.
2. Credit Builder Loan
Credit builder loan is a loan where fixed payments are made each month towards the total amount of the loan. Once the total amount and interest are paid off you will finally receive your fund amount.
Credit builder loans are those kinds of loans where the borrower does not get access to money until it is fully paid. By the end of all payments you will have a good credit score built through regular monthly payments. Once the amount is paid out fully, the borrower will get access to a savings account with the loan amount in it. Without any conditions, the money is fully yours once it is paid off.
3. Smaller Loan
This is one of the easiest ways to increase your credit score. Apply for a small cash loan upto AED 5000 and repay the loan amount in 6 months or a higher time period. It will improve your credit score quickly.
Do not close the loan before the loan matures. A longer period of credit history is considered better. Keep making regular payments for a long time period, credit score will grow better.
Check Here: Compare best personal loans in UAE
If you have enough money to close your smaller loan, ensure to pay the loan amount in bulk and remember do not close the loan prematurely.
Things to remember when you are taking out a loan to build credit score.
- Decide the loan amount carefully
- Don’t apply for multiple loans
- Make regular loan payments
- Do not close loans prematurely
- Do not apply for others debts
- Pay your old debts
Conclusion
Loan is not just meant for financial emergencies. It is also an effective tool for building credit scores. You have to be very cautious regarding payment of loan amounts otherwise you will fall into a debt trap. Understand your financial position before you apply for a loan. If you are not in a position to repay a loan do not choose the option of applying for a loan and increasing your credit score. Instead of increasing credit score, you will inadvertently cause damage to your credit score. Always remember, the higher your credit score, the better options you will have.
About the author
Vinay Kumar Goguru is a finance professional with more than 8 years of diverse experience as a researcher, instructor and Industry work experience with both public and private entities. Prior to MyMoneySouq, he spent 6 years in Berkadia, It's a commercial mortgage banking company. He has a "Doctoral Degree in Commerce" and two master's degrees with a specialization in Finance, one as Master of Commerce and other as Master of Business Administration. He has written several articles on personal finance, published by different International journals. He loves traveling, reading and writing is his passion. He has a dream of writing a book on his favorite finance topics.
