How a Short-Term Personal Loan Can Improve Your CIBIL Score

Your CIBIL score is a crucial factor that determines your creditworthiness and ability to access financial products. While many believe that taking a loan can negatively impact their credit score, a short-term personal loan, when managed responsibly, can help boost your CIBIL score. In this article, we’ll explore how a short-term loan can work in your favour and provide practical tips to make the most of this borrowing option.

Understanding the Impact of a Short-Term Loan on Your CIBIL Score

How a Personal Loan Affects Your Credit Score

When you apply for a short-term personal loan, the lender conducts a hard inquiry on your credit report, which can temporarily lower your CIBIL score by a few points. However, this dip is usually minor and short-lived, lasting around 12 months. The key to minimizing the impact is making timely repayments and maintaining a healthy credit utilization ratio.

Building a Positive Payment History

Your payment history is the most significant factor influencing your CIBIL score, accounting for 35% of the total. By consistently making on-time payments on your short-term loan, you demonstrate financial responsibility and gradually improve your credit score. Each timely payment is recorded on your credit report, contributing to a stronger payment history.

Example: Rahul took a short-term personal loan of ₹1 lakh with a 12-month repayment tenure. He set up automatic payments to ensure he never missed a due date. After a year of timely repayments, Rahul’s CIBIL score increased by 50 points.

Diversifying Your Credit Mix

A diverse credit mix, including revolving credit (like credit cards) and instalment credit (like personal loans), can positively impact your CIBIL score. A short-term loan helps diversify your credit portfolio, demonstrating your ability to manage different types of debt responsibly. This factor accounts for 10% of your credit score.

Scenario: Priya had only ever used a credit card before applying for a short-term personal loan. By successfully repaying the loan on time, she diversified her credit mix and saw a 20-point increase in her CIBIL score.

Reducing Your Credit Utilization Ratio

Using a Short-Term Loan for Debt Consolidation
If you have high-interest credit card balances, using a short-term personal loan to consolidate that debt can significantly reduce your credit utilization ratio. This ratio, which compares your total credit card balances to your credit limits, accounts for 30% of your CIBIL score. Experts recommend keeping your credit utilization below 30% for optimal results.

Sample Calculation:

• Current credit card balance: ₹75,000

• Credit limit: ₹1,00,000

• Credit utilization ratio: 75%

By taking a short term loan of ₹75,000 to pay off the credit card balance:

• New credit card balance: ₹0

• Credit limit: ₹1,00,000

• New credit utilization ratio: 0%

Establishing Credit History for New Borrowers

Building a Credit Profile from Scratch

For individuals with little to no credit history, a short-term personal loan can be an effective tool to establish a credit profile. By responsibly managing the loan and making timely payments, you can build a positive credit history and improve your CIBIL score over time. This is particularly useful for those with a zero or negative credit score.

Success Story: Aman, a young professional, had no credit history when he applied for his first short-term loan. He borrowed ₹50,000 and repaid it diligently over 6 months. This helped him establish a credit profile, and his CIBIL score jumped from 0 to 650 within a year.

Long-Term Benefits of a Well-Managed Short-Term Loan

Improving Your Credit Score Over Time
As you continue to make timely payments on your short-term personal loan, the length of your credit history increases, accounting for 15% of your CIBIL score. A longer credit history, combined with a strong payment record and diverse credit mix, can lead to significant improvements in your credit score over the years.

Unlocking Better Financial Opportunities

A higher CIBIL score opens doors to more favourable borrowing terms, such as lower interest rates, higher loan amounts, and longer repayment tenures. It also increases your chances of approval for credit cards, home loans, and other financial products in the future.

Airtel Finance: Your Partner in Improving Your CIBIL Score

Airtel Finance offers a range of short-term personal loan options tailored to your needs. With competitive interest rates, flexible repayment tenures, and a simple application process through the Airtel Thanks app, Airtel Finance makes it easy for you to access funds and build your credit profile responsibly.

To check your personal loan eligibility, visit: https://www.airtel.in/finance/personal-loan/eligibility

For a list of required documents, see: https://www.airtel.in/finance/perosnal-loan/documents

To understand Airtel Finance’s personal loan interest rates, go to: https://www.airtel.in/finance/personal-loan/interest-rates

By partnering with Airtel Finance for your short term loan needs, you can take control of your financial future and work towards a strong CIBIL score that unlocks a world of opportunities.

Conclusion

A short term personal loan, when used wisely, can be a powerful tool to improve your CIBIL score and enhance your creditworthiness. By understanding the impact of a personal loan on your credit profile, building a positive payment history, diversifying your credit mix, reducing your credit utilization ratio, and establishing a solid credit history, you can leverage a short term loan to your advantage.

Remember, responsible borrowing is key. Always borrow within your means, make timely repayments, and monitor your credit score regularly. With Airtel Finance by your side, you can confidently take steps towards a brighter financial future. Apply for a personal loan through the Airtel Thanks app today and start your journey towards a better CIBIL score.

FAQs:

1. How much can a short term loan improve my CIBIL score?
   The extent of improvement depends on various factors, but consistently making on-time payments and maintaining a low credit utilization ratio can significantly boost your CIBIL score over time, often by 50-100 points or more.

2. Can I get a short term loan with a low CIBIL score?
   While a higher CIBIL score increases your chances of approval and better terms, some lenders, like Airtel Finance, offer short term loans to individuals with lower credit scores. Check your eligibility at https://www.airtel.in/finance/personal-loan/eligibility.

3. How long does a short term loan stay on my credit report?
   A short term loan typically stays on your credit report for up to 2 years from the date of account closure. However, the impact of hard inquiries usually subsides within 12 months.

4. What is the ideal credit utilization ratio for a good CIBIL score?
   Experts recommend keeping your credit utilization ratio below 30% for the best results. This means your total credit card balances should not exceed 30% of your overall credit limit.

5. Can I use a short term loan to consolidate my debt?
   Yes, using a short term personal loan to pay off high-interest credit card balances can significantly reduce your credit utilization ratio and improve your CIBIL score. Airtel Finance offers competitive interest rates for debt consolidation.