How can I use a personal loan to improve my credit score?

If you handle a personal loan sensibly, you can use it strategically to raise your credit score. Here’s how a personal loan can contribute to building a stronger credit profile as of June 2025:

• Timely Repayments: The most significant factor influencing your credit score is your payment history. By paying every EMI on or before the due date you demonstrate financial discipline. Consistent on-time payments help establish a positive repayment record which can steadily boost your score over time.
• Credit Mix Diversification: Credit scoring models favour individuals who have a balanced mix of credit types, such as credit cards (revolving credit) and personal loans (instalment credit). Adding a personal loan to your portfolio shows you can manage different kinds of debt, which can have a favourable impact on your score.
• Debt Consolidation: If you use a personal loan to pay off high-interest credit card balances or other revolving debts, you can reduce your credit utilisation ratio. Lower utilisation is viewed positively by credit bureaus and can lead to an upgrade in your credit score. Consolidating multiple debts into a single personal loan can make repayments more manageable and reduce the risk of missed payments.
• Building Credit History: For those with limited or no credit history taking a personal loan and repaying it as agreed helps establish a track record, making it easier to qualify for future credit.

It is crucial not to borrow more than you can comfortably repay. Overextending yourself or missing payments will have the opposite effect, potentially damaging your credit score. Always review your financial situation and ensure you can meet the EMI obligations before taking a personal loan for credit-building purposes.