In this write up, you will learn how a loan affects your credit score. What is a loan? A loan is money borrowed from a lender to be paid within a specific period. The duration of this contract depends on the two parties. The creditor trusts that the borrower will be able to pay back in due time. It is only when you have a good credit that a creditor will agree to lend you money. When your credit is poor or bad, you may not get an approval.
Moreover, you are assessed by how good or bad you handled previous debts. This means that your previous payments on a loan has an impact on your credit score.
How A Loan Affects Your Credit Score
An ordinary loan application can lower your score since 10% of your credit score comes from the number of credit-based applications you make.
On each credit application, an inquiry is kept on your credit report. This indicates that a firm has reviewed your report. A lot of inquiries within a short period tells bad on you. It shows you have financial problems.
However, it is only when you are shopping for mortgage or auto loan that many inquiries will not affect your credit score. This grace period is between 14- 45 days.
When You Pay on Time, You Increase Your Credit Score
Always make your monthly payments promptly. Early or due payments will show that you are responsible and credit worthy. Payment history is 35% of your credit score. Due payments is one of the most important factors in building your credit score. Late payments damage your score and attracts late payment fees. When you frequently miss payments, it may lead to a repossession of your car and foreclosure on your home.
How A Loan Affects Your Credit Score : High Loan Balances
Moreover, your loan balance also affects your score. High balances reduce credit score. Low balances increase the credit score.
Your Loan And Your Income-Debt Ratio
Furthermore, the loan you have makes up your debt-to-income ratio. Your debt-to-income-ratio is a measure of the amount of your income that you spend on debt payments.
Even though your debt-to-income-ratio is not part of your credit score, many financial institution evaluate one’s income. This is necessary to see if you will be able to pay back the loan.
What Can YOU Do?
Whenever you get a loan, stick to the agreement. Do not make late payments or miss them. Due payments raise your credit score and make you creditworthy. Also, avoid too much loans. When your debt is too much already, another institution may not be willing to lend you money. In conclusion, instead of borrowing, work harder, turn your hobby into a source of income to earn more.