In today’s world, there are a lot of financial products at your disposal. These financial products can help you fulfill your need or want depending on the need of the hour. There are education loans which you can take to complete your educational goal, similarly, you have personal loan options which can help you fulfill what you want. There are so many attractive offers on credit cards that you cannot resist having one, slowly without you realizing you understand that you have a pile of financial products on your credit report.
If you do not make all these payments on time, you will end up having a bad cibil score. Understanding this, you plan your finances and decide to close one of the loans which are running. But is it really a good idea to close a loan account? Will that really help you in the long financial run?
You might seem that logically you should close the loan account so that you release yourself from the monthly EMIs and also you get a sudden boost on the score. But, this is not the case, when talking about cibil scores; there are a lot of factors which affects its appreciation and depreciation. Let’s understand how it works.
Installments vs. credit cards
When it comes to credit cards, the account associated to the credit card is called revolving accounts. If you happen to spend your limit in a month and in the next month you don’t, your account still remains open. An open account is more accountable to your cibil score rather than a closed account.
Such is not the case with installment loans. When you take any loan, the terms of repayments are already decided and also the loan tenure. After a specific period, the loan gets expired and does not add up to the credit score. If you plan to close the loan account before time, it will not harm your score but also will not contribute to your score.
Now that you know what is the difference between a loan installment and a credit card, lets understand if it’s a good idea to pay the loan off before time.
Accounts with balances
Accounts with balances are one of the major factors which contribute to your cibil score. If you happen to close the account you will have an account less with balance which would have contributed to your credit score.
Types of credit
Different types of credit you have, the more you have chances to enhance your cibil score. if you have different types of accounts like an auto loan, two wheeler loan, home loan, credit card etc. it shows you can manage different accounts without any hassles. A credit report looks good to your future lender if you have old and long aged accounts. When you pre-close the loan, the account is closed.
Paying off the loan early
If you are planning to close the loan account early, understand that it will definitely not hurt your credit score. The credit scoring models through different bureaus like to see open accounts and good transactions happening on them. If you plan to keep the loan account open, the credit rating will understand that you can manage your loans properly, which is very good for your credit score.
Instead of completely closing the account, we can suggest you to make partial payments from time to time. This will not only help you get your installments down but at the same time can help you with lowering your interest rates down. If you have a large amount to pay, you can always take this option. Do consult with the banker before doing this, as there are pre-payment charges involved in this process.
Regardless of whether you plan to close the loan, make sure you make all your payments on time. Even if you decide to pay off your loan it will remain in your credit report for at least 7 years. Paying off your loan is a pretty good thing which will ease your financial tension, try closing it by the purpose of not giving interest on your loan instead of greediness to appreciate the credit score.
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