How to Improve your Credit Score with a Personal Loan

Nov 22, 2023
 |  1 min read

A credit score is an important factor that lenders consider before giving you personal loans or credit cards.

But what is a credit score? A credit score is a report card showing your financial behaviour. The three-digit number of your credit score reflects your money-borrowing and repaying performance.

Lenders use it to decide whether to give you a loan or credit card and what interest rate to offer. If you want to increase your credit score, a personal loan can be a smart move. Let us find out how and why using a personal loan can help build credit.

Why using a Personal Loan can help Build Credit?

Personal loans can be an important tool to improve your credit score. Why?

Firstly, because these loans are structured and have fixed repayment terms, you will have a set number of monthly payments. Consistently making on-time payments demonstrates your responsible financial behaviour to credit bureaus, positively impacting your credit score.

Another aspect that makes personal loans attractive is it improves your credit mix, i.e. the different types of credit accounts you have. A credit mix shows you can manage personal loans and credit cards responsibly. It's one of the factors that affect your credit score, so having a good mix can help your creditworthiness.

How to Build Credit using a Personal Loan?

Now that we have established why personal loans are a good choice for building credit let us dive further into how to build credit using a personal loan.

Check your credit report: Start by checking your credit report and score. This initial step will help you understand where you stand and identify any errors holding your score back.

Get a Personal Loan: Borrow money from a bank or a lender to build credit.

Make Payments On Time: Pay that money back in smaller amounts over time. It's super important to always pay on time.

Watch Your Credit Score Grow: As you keep making on-time payments, you're building a good credit history. The more points (or good history) you have, the better your credit score becomes.

Always borrow what you need and can afford to pay back, and never miss a payment. Building credit with a personal loan is a slow and steady process, but it can open doors to more financial opportunities in the future.

Alternative Ways to Build Credit

While personal loans are a valuable tool for improving your credit score, there are other options also. If you are looking for alternative ways to build credit, here are a few points to consider.

Use Credit Responsibly: Get a credit card or loan. Make small purchases and pay them off on time.

Pay Bills on Time: Always pay bills, like rent and utilities, on schedule.

Credit Builder Loan: Consider a small loan to help you build credit.

Authorised User: You can benefit from other users' credit scores if they add you as an authorised user on their credit card.

Monitor Your Credit: Monitor your credit report to spot and fix errors.

Low Balances: Keep credit card balances low relative to your credit limit.

Credit loan app and instant loans are designed for those with limited credit histories and offer easy loans. While they might have higher interest rates, these options can help you build credit if managed responsibly.

Improving your credit score with an instant loan online is a viable and effective strategy. The structured nature of personal loans, the credit mix they offer, and their potential to save you money on high-interest debt make them a strong choice.

However, it is essential to approach personal loans responsibly, make timely payments, and understand the terms to reap the full benefits. If personal loans aren't the right fit, consider alternative methods to build or rebuild your credit.

Whether you choose personal loans or other options, building and maintaining good credit through mPokket is a wise financial move that can open doors to better borrowing opportunities in the future.

Gaurav Jalan

Gaurav Jalan is the Founder and CEO of mPokket, a digital lending platform serving underserved Indian youth. He leverages technology and experience to deliver cost-effective credit to marginalized populations. In his role, he provides strategic direction and oversees execution to fulfill mPokket's mission.