How loan prepayment impacts your credit score | Fusion - WeRIndia

In India, credit scores, ranging from 300 to 900, are issued by four RBI-licensed bureaus: TransUnion CIBIL, Experian, Equifax, and CRIF High Mark.

A score above 750 is considered excellent and boosts your chances for faster approvals and better loan terms.

Loan prepayment, whether partial or full, can improve your credit score, but with some nuances.

Here’s how and why it works, and what to watch for.

How Prepayment Helps Your Credit Score

• Paying off a loan reduces your total outstanding debt. This lowers your credit utilisation ratio, a key metric that signals creditworthiness to lenders. A lower ratio (ideally below 30%) shows responsible credit use.
• If you’ve paid EMIs on time before prepaying, the loan ends on a positive note. A “closed” loan account reflects disciplined repayment, improving your profile.
• Unlike a “settled” status, which harms your score, a “closed” account proves that you’ve met all obligations. However, closing your only loan can slightly reduce your credit diversity and average account age, both minor and short-term effects.

Pitfalls to Avoid

• If it’s your only credit product, closing it too soon may shrink your credit footprint. This may affect future applications unless you build a history with other accounts.
• Floating-rate personal loans don’t have penalties under RBI rules, but fixed-rate loans might. Always check your agreement for hidden costs.
• If your loan has a low interest rate, consider investing the extra cash in mutual funds, FDs, or an emergency corpus.

Don’t expect an instant credit boost. Credit bureaus update scores monthly, so any positive change may take 30–60 days to reflect.

Post-Prepayment Checklist

• Request an NOC (No Objection Certificate) from your lender.
• Check your credit report after 1–2 months.
• Dispute any errors if the loan isn’t shown as “closed.”

Prepaying a loan is a smart financial step. It reduces debt, builds a strong repayment history, and shows lenders you’re financially responsible.

Though credit score gains may not be instant, the long-term impact is positive, especially in India’s evolving credit environment.

Staying informed gives you better control over your credit journey.

Image from Pxhere (Free for commercial use / CC0 Public Domain)

Image Published on April 02, 2017

Image Reference: https://pxhere.com/en/photo/1335729