Everyone has a credit score associated with them. They might or might not know about it, but this score is a critical factor in their financial history and credibility. The better your score, the more likely it is that banks will give you loans or credit cards in terms favorable for you. A good credit score helps you get loans at lower interest rates and save money in the long run. Improving your credit score is not a quick or simple process, but it’s not impossible either.
What is a credit score?
A credit score is a three-digit score that helps financial organisations determine how likely you are to repay a debt. It is based on your credit history – a record of your demonstrated ability and willingness to repay debts. Your credit history would also include information regarding your bankruptcies or collections, all contained in a credit report. Credit scores usually range from 300 to 850. With a credit score of 700 and above, lenders are likely to approve your loans easily, but if you have a score below 650, banks may not even consider your request.
How is a credit score calculated?
There are three main credit bureaus in charge of creating your credit reports, and a statistical algorithm is applied to any one of these reports to calculate the score. The algorithms used by different lenders are not the same, although there are some commonly used ones like the FICO model. Hence, you would probably have dozens of credit scores.
However, the factors that decide whether your score is high or low are similar for all the models. So, if your credit score is low according to one model, it is unlikely to be high according to any other model. The factors considered are usually your loan and credit card repayment history, your usual revolving credit, the types of accounts you have, how often you apply for new credit, etc.
How can an instant loan improve credit score?
The concept of a loan resulting in an improved credit score seems paradoxical since the very definition of a loan is that it puts you in debt. However, a credit score is not a measure of an absence of debt – it’s a measure of your ability to repay debt. It’s a popular belief that a responsible and consistent use of credit cards can improve your credit score. However, credit card interest rates are high and difficult to keep up with for many people. Instant loans, on the other hand, have affordable interest rates. These are unsecured loans ranging between ₹ 5000 to ₹ 2,00,000, which don’t require security or collateral, and are approved online. Instant cash loan apps like EarlySalary require minimal documentation and rely on parameters beyond your credit score than banks. With the lower interest rates, it is easier to use such loans responsibly and pay off the related debts regularly. Instant cash loans can also be used to consolidate your debts, i.e., with their lower interest rates, they can be useful in settling the high interest rates of your credit cards. Timely and responsible repayment of instant loans can therefore improve your credit score, and also help you pay off the debt on your credit cards on time.
Although it sounds counterproductive, instant instant money loan apps can help improve your credit score in a significant way, both directly through their regular repayment and indirectly by consolidating your other high-interest debts.