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Loans are valuable financial tools that can help you pay for almost anything, from a house or car, to a business, to emergency medical bills. But what impact do loans have on your credit score?
After all, your credit score is essential to qualify for loans in the first place, as well as other credit products. The three numbers that make up your credit score help determine the loans and credit cards you can get and the interest rates you’ll pay. Your credit score can even impact your employment, rental opportunities, and insurance premiums.
The importance of a good credit rating cannot be underestimated. If you have bad credit or not enough there are credit repair experts ready and willing to help you now.
Here’s how loans can positively or negatively affect your credit score.
How loans can affect your credit score
Mortgage, student, personal and other loans can affect your credit score in several ways, including:
- Making regular, on-time payments can help establish and maintain a healthy credit score. On the other hand, late or missing payments can harm him. In fact, your payment history is the most important factor in your credit score, accounting for 35% of your FICO score.
- Some loans can help you get started with credit. Student loans help many graduates build their first credit score. Credit-building loans can also help people with little or no credit history build enough credit for the three major credit bureaus – Equifax, Experian and TransUnion – to generate a credit score.
- A loan can diversify your credit mix. People with high credit scores tend to have a diverse portfolio of credit accounts, which can include a credit card, student loan, and other credit products. For example, having one credit card, car loan, and student loan is generally better for your credit than having three credit cards. Your credit combination represents 10% of your FICO credit score.
- A loan can improve the length of your credit history. The length of your open credit accounts represents 15% of your credit score. Generally, the longer your credit history, the better it is for your credit score. Mortgages, student loans, and other loans with long repayment terms can lengthen the age of your credit history as well as the average age of your credit accounts, which can improve your credit score.
If you have low credit or want to increase your current score, there are steps you can take now.
Advantages and disadvantages of loans
It’s generally not a good idea to take out a loan just to help you build credit. You should have a legitimate need for any loan you are considering. If you are considering applying for a new loan, be aware of the pros and cons before making a decision.
Benefits of the loan
- Loans can help you reach your financial goals like owning a house or a car.
- Making regular, on-time loan payments will help establish and maintain a strong credit rating.
- Loans can help you get money for almost any purpose, from consolidating credit card debt to financing a major home renovation.
- If you don’t have enough funds in your emergency savings, personal loans can help you cover your bills if you suffer a major financial setback, such as loss of income or unexpected medical expenses.
Disadvantages of the loan
- When you take out a loan, you get into debtpotentially leading to stress and limited financial options if you don’t manage debt responsibly.
- Virtually all loans come with interest rates, which is the amount the lender charges you to borrow money (usually a percentage of the loan principal).
- Poor debt management can have disastrous consequences. For example, if you fail to repay a home loan, the bank may foreclose on your house. Not only will you lose your home, but having derogatory marks like foreclosure, bankruptcy, or repossession on your credit report can seriously hurt your credit score for seven to 10 years.
- Even a 30 day late payment can hurt your credit. While a 30-day late payment won’t hurt your credit score as much as more serious derogatory marks, the incident will remain on your credit report for seven years.
Stay on top of your credit by regularly reviewing your credit report for errors or fraudulent information. In addition, check your credit score periodically to see the impact of your actions on your credit. And if you want to work on improving it, start today.
How to Maintain Healthy Credit and a Solid Credit Score
Establishing and maintaining good credit is essential to your overall financial health. Keep the following best practices in mind to help you maintain strong credit.
Pay your bills on time
Consider setting up automatic payments or alerts on your smartphone to ensure you never miss a loan payment. As mentioned, your payment history is the most important factor in your credit score. Regular, on-time payments can have a positive effect on your credit score, while late or missed payments can have serious consequences.
Keep credit card balances low
Your credit utilization rate, or how much of your available revolving credit you use, is the second most important factor in your credit score, accounting for 30% of your score. While credit experts generally recommend keeping your utilization rate below 30%, people with high credit scores often have credit utilization rates below 10%. In this case, if you have a credit score with a credit limit of $1,000, you should aim to keep your balance below $100 on the card.
Be attentive to difficult requests
When you apply for a new loan or credit card, the lender or company does what is called a “thorough investigation” of your credit report to review your credit history and determine your creditworthiness. A serious investigation can temporarily lower your credit score by five points or less, according to FICO. Before applying for a loan, check to see if the lender offers a prequalification option. Prequalifying only requires a soft credit check, so you can see if you’re likely to be approved for a loan without hurting your credit.
Do you have additional questions about your credit score and ways to increase it? Get in touch with an experienced credit repair expert who can help you.
