How Personal Loan EMI Payments Affect Your Credit Score?

In India, personal loans are very popular as it helps people get over the temporary or an urgent need of cash. However, personal loan attracts some of the highest rate of interests that ranges from 15 to 20 percent across banks. To pay the loan debts, full or part payment is done by the customer. Both have a significant impact on your credit score.

Prepayment of an ongoing personal loan will close your loan account, which will shore up your credit score. On the other hand, part payment of a loan, if done sincerely will reduce your total loan burden and has no effect on your credit rating. But, if you miss your EMI’s, you’ll have to pay a penalty on the interest rate charged to you and your credit score will drop significantly. Let’s try and understand what actually a credit score is and how personal loan EMI payments can affect your credit score.

What is a credit Score?

A credit score is a 3 number that sums up your financial history prepared by the CIBIL (Credit Information Bureau, India Limited) by accessing your secured and unsecured loans or credit cards information in the past. This information is provided to CIBIL by various financial institutions on the monthly basis. Mainly, the credit score ranges between 300 and 900. The exact minimum score limit tends to vary from one lender to another, most banks seems to be favorable towards those with a credit score above 750.

How can one build a good credit score?

To build a good credit score, one must

1. Pay all the outstanding dues and EMI’s on time
2. Review credit report regularly to check the status of payment on the report. Sometimes your credit report may contain false information due to delayed information provided to CIBIL. This may adversely affect your credit score. So, it is always advisable to check your credit report for any such errors in the gap of every 6 months.
3. Do not apply for more loans or credit cards until the previous debts are paid off efficiently and your credit score is improved
4. Monitor dues every month and streamline expenses to avoid delay of EMI’s or credit card bill payments.

Importance of a good credit score

A good credit score indicates that you are maintaining your personal loan and credit card payments efficiently. Besides, you may also get following benefits:

1. A person with a good credit score can easily get a home loan or personal loan approval from the banks.
2. Anyone with poor credit score may get the loan but on higher interest rates that would translate to higher EMI’s. This is not the case with individuals having good credit score.
3. A credit score is used to determine whether you are eligible for the new credit card or loan to finance your education, buy a new home/car, or even to start a new business.

How personal loan EMI affect your Credit score?

Having multiple home loans, personal loan, and other loans may cause your credit score to decline significantly and in such a case you will be charged a higher personal loan interest rate. Because this indicates the high debt you already have. Usually lenders determine your DTI (debt to income) ratio prior to approving your loan and if yours shows that you are currently overloaded with debt, they will not consider you worthy of further credit as they will think that you are incapable of successfully repaying more EMI’s. However, it is not just multiple loans and credit cards that badly affect your credit score, it is only the unpaid debt on them that really counts against you.