A personal loan is taken for various personal reasons or during an emergency. It was one of the most popular loan types considered during the covid -19 pandemic, providing timely financial support to face financial challenges.
But once you bounce back financially and wish to make a personal loan prepayment to lessen your burden, there are many misconceptions about credit score that may come across. This article will guide you throughout about the factors that will affect your credit score, and which will not affect your CIBIL score.
What is personal loan prepayment?
Personal loan prepayment is the pre-closure of the loan before the lock-in period or before the expiry of its tenure. Loan applicants can opt for part or full payment. However, personal loans usually have a one-year lock-in period before customers decide to prepay.
Individuals who have the misconception that personal loan prepayment will affect your credit score are not true. Paying the loan early will not reduce your credit score but will comfortably allow you to settle down your dues. Moreover, part of your credit score is based on how long your accounts have been established. If you pay it off within the lock-in period, you may be charged a penalty. Some lenders may be flexible and do not levy any loan prepayment penalty. The penalty charges may differ from lender to lender.
What is a CIBIL score?
A CIBIL score is a significant three-digit numeric that influences your credit history positively and negatively.
There are several factors that may affect your credit score, but loan prepayment is purely a misconception that will not affect your CIBIL score.
Let's have a glance at some of the factors that will impact your CIBIL score and how you should keep yourself vigilant while taking a personal loan.
Factors that can decline your credit score on taking a personal loan:
Late payments – Non-payments and delayed payments may adversely affect your CIBIL score. This action indicates that you are not capable of repaying the loan. As a result, your credit score may reduce. Hence, make your loan repayments on time. Even if you have sufficient money to make the prepayment, you should make the payment till the expired tenure for a better credit score.
Multiple Cards – Carrying multiple credit cards may affect your credit score negatively. Having a balanced equation of secured and unsecured loans and credit cards helps you improve your credit score.
**Credit limit – **If you are an avid credit card user, you must have a higher credit limit. Your credit limit should not exceed more than 30% of the total limit. So, if you try to spend beyond the limit, your credit score will be negatively impacted.
Factors that do not affect your Credit Score
**Cheque Bounce/Stop Cheque Payment – **If you are consistent with payments, but there is a cheque bounce due to some unknown reason, or a stop payment, your credit score will not come down. It is a misconception that cheque bounce or stops payment will kill your credit score, provided you are not defaulting and delaying the EMIs against the personal loan policies and procedures as suggested by the lender.
**Payment for Utility bills – **Paying for expenses like rent, utility bills, or phone bills will not impact your credit score.
**Healthy credit mix – **Lenders generally observe a healthy mix of secured and unsecured borrowings. So, when you take loans striking a good balance, it doesn’t affect your credit score.
Bottomline
It is always advisable to follow the terms and conditions of the financial institution and NBFCs while taking a personal loan. Paying timely loan EMIs will not influence your CIBIL score negatively. If you want your CIBIL score to be in good books, always maintain your loan account without breaching the lender's policy.