How loans help in building a strong credit score

By Sahaj Palla

One fine day you discover that you need extra money for an urgency that came without warning. So, you decide to take a loan from your bank, but instead of getting money you are being told that you are not eligible for a loan! Surprised? This is because you don’t have something called a credit score.

The first law of getting credit is to have a strong credit score. But here's the catch: how do you build a credit score? You can build a credit score by taking a loan and paying it back over time. That again brings us to the question of how to get a loan or rather how to get your first loan.

There are a number of ways through which you can avail a loan.

Credit Builder Loan: A credit building loan is a loan that you get after you make the payments. Yes, you read that right, so the bank you take this type of loan from, opens an account in your name and deposits the amount agreed upon. You can only access the amount after you repay the loan in full. Once you’ve paid the loan amount on a timely basis, you start building your credit score.

Secured Credit Card: Unlike regular credit cards where you use the credit and pay the bill, in a secured credit card you pay a security deposit to the credit card issuer. The issuer then opens an account with the security you’ve given, that is usually the credit limit you have on your card. So, you use the card and pay the bill on time like any other credit card, and build your credit score.

Unsecured Loan: An unsecured loan doesn’t have any collateral against it, but it does have a higher interest rate. So, if you do get an unsecured loan, be prepared to pay it back with high interest. These are risky and you should never bite off more than you can chew, so make sure that you are able to pay back the loan fully and on time, to build your credit score.

Buy Now Pay Later: Also known as BNPL, this is a kind of short-term loan that you can take to pay for your purchases and break down the cost into easy instalments. These loans are available on many online merchants like Amazon and MakeMyTrip. Usually you can avail these loans by signing up and agreeing to the terms and conditions. Making timely repayments of a BNPL loan can also help in building your credit score.

A strong credit score is one of the most important requirements of getting a loan that can be built by making timely repayments. In today's digital age it is fairly easy to to get a loan, however, one should use their credit wisely and repay back on time to have a healthy credit score.


What is a credit score?

A credit score is a number that represents an individual’s creditworthiness, it ranges from 300 to 900. Higher the score the higher your chances of securing a loan.
However, there are a lot of things that go into making a credit score. These include your credit history, number of open accounts, total level of debt, repayment history, among other factors.
In all its simplicity, a credit score is a means for lenders to evaluate your loan repayment capacity.

Can anybody have a credit score?

Having credit enables anyone to have a credit score, although individuals like students may find it challenging to establish a credit score due to their limited earning capacity.
Nonetheless, they can still establish a credit score if their parents grant them a credit card under their name.

What happens to credit score if repayments are not made on time?

Your credit score drops if you fail to make a repayment on time.
Also, you will be having trouble procuring new loans/credit cards as the same goes on your credit report.

What factors impact credit score negatively?

Here are some factors that can cause your credit score to drop:

  • Untimely repayments
  • Maxing out credit cards
  • Having no loans or debts – If you never had loans or credit cards
  • Too many loan applications
  • Unpaid debts

Can a credit score be wrong?

Yes, it could be possible that your credit score might have errors from the lender’s end. However, you can submit your grievance to  CIBIL by going to the Consumer Dispute Resolution page on their website.


The information in this article is compiled from various sources  and is an opinion piece only. This is not to be taken a substitute for professional advice on managing finances, reader discretion is advised.