What Improves Credit Rating Best? Credit Cards vs. Personal Loans

Taking out a credit card or a personal loan is not so hard if the applicant follows particular guidelines. The process is rather fast and easy comparing to getting home or auto loans. But let’s figure out how those financial options can impact your credit score. A high credit score is very important when you apply for a mortgage or an auto loan, because it may help you qualify for a loan with competitive rates. Credit Cards Credit cards are one of the easiest ways to start your credit history. Using plastic wisely, you can even avoid paying any interest. So, if you are one of those, who has no credit rating, credit card is a good start. And if you already have one, just follow simple tips to make your credit card work for your benefit. The basic rule for establishing a good credit score is making payments on time. Your credit score is based on the way you have treated your debt in the past. Missed and delayed payments can just ruin your credit. So try to avoid them. Today there is a tree day grace period for making payments, thanks to RBI. It means that if you forget to pay on a due day or there are holidays which prevent you from making your payment on time, you have three days to pay before it will be reported to credit agencies. If for one reason or another you can’t pay in full, consider providing the minimum payment due. In that case, it won’t be reported to the credit agencies as default. Still, be ready to pay interest on overdue amount for having been saved from getting a default in your credit report. If you just start your credit history, try to make small transactions regularly (below 30% of the sanctioned limit is ideal) and pay them with no delay. If you are working on improving your score, pay more attention to your credit utilization ratio. It’s also one of the most important factors which impact your credit rating. Low credit utilization ratio does wonders, so increase your credit limit (if it is possible) or cut spending. Typically, a regular use of one card can be enough to keep a stable credit score, in case you don’t touch a sanctioned limit and make payment on time. If you use several cards at a time, keep those credit cards which have no (or at least minimum) defaults and a deeper history. And keep in mind, that too many credit cards show credit hungry behavior. Personal Loans A good mix of secured and unsecured debt can help you maintain a good credit score. Personal loans are unsecured, but they are installment loans, thus don’t revolve debt like credit cards. If you are going to take out a personal loan just to boost your credit score, think it over again. In case you are using a credit card, you already have a revolving credit. It means that taking a personal loan you just add to the category of unsecured loans. Personal loans are not designed for any certain purpose, so you can use them for anything. You can use them to pay off your credit card dues, for example. But remember that you should always think twice as any financial option may lead to debt. If you can qualify for a personal loan with the interest rate that is lower than what is being charged by your credit company, then it may be a wise move to use these loans to pay dues. You can improve your credit this way. Keep in mind, that too much unsecured loan can negatively impact your credit rating. So, if you are regularly using your credit card, personal loan can just have no value in getting a good credit score.