How a short-term loan can improve your CIBIL score? - PaySense Blog

Your credit score isn’t just any random number; it’s a key to easy loan approvals and favourable loan terms. When applying for any type of credit, lenders first look at your credit score to ensure you can repay the loan back. So it makes sense to build your credit score before anything else. But how do you do that?

Well, one of the fastest ways to have an excellent CIBIL score is by borrowing a short-term loan. Let’s explore this option by understanding how CIBIL scores work first.

What determines your credit score?

Your credit score is determined by one of the four credit bureaus of India, which have access to all of your financial and lending history. You can conduct a CIBIL score check free by visiting these bureaus’ official websites or through third-party platforms.

The following table will give you an idea of how different factors affect the value of your credit score.

S no.FactorHow it affects your credit score
1.Your repayment record for secured loans and unsecured loansIf you make timely EMI repayments and credit card bill settlements, your credit score will increase. Conversely, if you’re tardy on payments, your credit score will take a hit.   Additionally, delays or defaults on secured loan repayments harm your credit score more than unsecured loans.
2.Settlements, defaults, and write-offsIf you have a recent loan write-off or multiple write-offs, it will negatively impact your credit score.  
3.Credit usageThe percentage of available credit you are using is known as your utilisation rate, and it affects your credit score considerably. Ideally, it should be less than 30%.
4.Length of credit historyLonger credit history is seen as a mark of experience with credit management.
5.Credit mixYour ability to handle various forms of credit is also an essential factor that decides your credit score. So, make sure you have a healthy mix of loans, credit cards, and other lines of credit on your portfolio.

How can you increase your credit score with a short-term loan?

As the name suggests, a short-term loan has a short tenure – typically 24 months or less. The best part about these loans is that you can avail them even if you have a non-existent or poor credit score. 

Also, while applying for a loan, make sure you borrow less. It’ll make repayments more manageable, allowing you to ramp up your credit score rapidly. What’s more, if you only have credit card debt, adding a loan can provide your credit portfolio with much-needed diversity.

Plus, short-term loans are unsecured loans, which means the lender does not ask for any security or collateral. Also, as mentioned in the table above, if you delay or default on making payments on unsecured loans, your credit score will not suffer much harm. Still, you must try not to delay or default at all. Lastly, make sure you conduct CIBIL score checks regularly to see where you stand.

With these tips in mind, you can make the most of your short-term loan.

Final thoughts

It is crucial to maintain a good credit score for all your future borrowing needs. An excellent credit score not only makes lenders trust you but also gives you the power to negotiate preferential loan terms. So, conduct a CIBIL score check today, and see how you can improve it.

By Richard