All aspects of your financial life will affect your credit score, and loans are no exception. Loans are a necessary part of life, allowing you to buy major items you might not otherwise afford, like cars and property.
Taking out loans reduces the money you can borrow, but if you pay them off as required, you can build your credit. Knowing how different loans affect your credit score will help you understand how to use them to your advantage.
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How to manage loans
You must keep detailed records about your loans to ensure you make regular payments and stay in good standing. Using loan servicing software to track payments keeps you on top of the paperwork so a loan won’t negatively impact your credit score.
How new loans affect your credit score
Financial institutions compile your credit score according to many factors, including:
- Outstanding debt
- History of bill payments
- Available credit in use
- Number of loans you have
With this knowledge, you can build smart credit to raise your score. Taking out a new loan damages your credit score, so if you’re starting high, you won’t feel that impact as much.
Before issuing a loan, the lender pulls your credit report to determine your reliability. Every time there’s an inquiry into your credit history, you’ll lose a few points. One or two requests are reasonable, but multiple inquiries deal significant damage if you keep searching for a loan.
How personal loans affect your credit score
A personal loan can help you pay off debt. Personal loans have lower interest rates than credit cards, so you might take out a loan to pay your medical expenses more reasonably.
Shop around for one with the lowest interest rate to ensure you can pay it back within a reasonable period. If you apply for loans with various lenders, do it all within 45 days to decrease the impact of the new inquiries on your score.
How missed loan payments affect your credit score
Your credit score takes a significant hit when you miss a loan payment. The lenders aren’t getting the money you promised, and you’ll have more outstanding debt, bringing down your score. If you have trouble making the payments, try renegotiating the loan with a lower interest rate.
How cosigned loans affect your credit score
Cosigning a loan is a good deed because you’re helping someone with bad credit get the money they need. However, even though the loan isn’t for you, it still appears on your credit report. Therefore, your credit score can also suffer if the borrower misses payments.
Since the loan shows up on your credit report, cosigning for someone else can also impact your ability to get a loan. Only cosign for someone you trust to make the payments.
Before you go
There are several ways loans can affect your credit score, both good and bad. Knowing all the possibilities empowers you to make the best financial decisions. It’s worth noting that you can get loans with bad credit, but you have limited options. The best way to handle loans is to ensure you can make regular payments to keep your credit score in good standing.
