How Does a Personal Loan Affect Credit Score?
While it appears enticing to go for no credit check personal loans, you should not forget the possible consequences of taking any type of credit. When you face an unexpected expense and don’t have enough cash saved, the solution is usually finding the right place to borrow money. While it appears easy to apply and get approved for personal loans, you should understand these types of credit affect your credit score. If you want to avoid severe consequences, you must make payments on time. Being late on payments will significantly damage your credit score if the lender reports to the credit bureaus.
Knowing how personal loans affect on credit score will help you borrow responsibly to avoid damaging your credit rating. Unlike mortgage loans, which serve specific purposes, personal loans are consumer products that one can use for about anything. For example, you can take out a personal loan to support your new business, settle medical bills, or pay for an urgent home repair. Because of the low-interest rates than credit cards, personal loans attract many people who use them to repay credit card debt or settle other high-interest debt.
The loans are sometimes advertised as the perfect option for debt consolidation. However, the loans are unsecured, which means you don’t require an asset as collateral to borrow. So, the interest on bad credit personal loans is usually high as the lender has to protect themselves. Some of the different categories of unsecured personal loans you can find including home mortgages and auto loans.
You can apply for a loan from an online lender or a credit union. To qualify for the loan, you need to meet certain terms, including proof of income, citizenship, minimum age of 18, and proof of residence. If you have a good credit history, you can get approved in 24 hours. Some lenders even offer same-day cash transfers, making their products perfect for addressing cases involving financial emergencies.
Does Applying for a Personal Loan Affect Your Credit Score?
If you’re borrowing cash, you need to understand the relationship between personal loans and credit scores. When applying for a loan, the lender could subject your request to a hard inquiry, which happens when a lending institution reviews your credit report as a part of reviewing your application. The hard inquiry could leave negative effects on your credit score and might stay in your report for two years. How much your credit rating is affected depends on the specific financial situation you’re in.
An account with too many inquiries, especially in a short period, will be affected. If the credit report shows several credit applications in a short period, it will show lenders the fact that your finances are negative. You can avoid credit inquiries by confirming your credit scores before you apply for a loan. Reviewing your credit will give you a clear idea of whether the lender will approve your loan request. The better your score, the higher the likelihood you will be approved.
Also, consider following the pre-approved process. Finding out whether you’re pre-approved before you submit your application will not guarantee success, but it will give you a hint. This is a soft inquiry. It does not affect your credit report.
How Does a Personal Loan Affect Your Credit?
Personal loans are reported to credit reporting agencies, so when you borrow, this information is logged. Your repayment schedule and pattern are also reflected on your credit report, which means if you want to improve your credit score, you must stick to the repayment agreement you reached with the lender. A personal loan can easily hurt your credit score, so you must always borrow an amount you’re sure you can repay without skipping payments.
One way applying for loans affects credit score is when you miss the due date for payments. Payments delayed for more than 30 days can be reported to the credit bureaus, which leads to damage to your credit score. For example, if you have a score of 780, delinquency of 30 days could slash your score by up to 110 points, which moves your rating from excellent to fair.
Both the age and amount of the loan can have an impact on your credit score. How you manage the loan is important as it determines how information about your creditworthiness is recorded. It’s advisable to follow up on payments to ensure you don’t have late repayment or don’t miss payments. Good payment history will be reflected in the form of positive credit scores. If you’re late on payments, it will hurt your credit scores. But you could also use personal loans to build your credit scores. Here is how.
How Will a Personal Loan Help My Credit Score?
Now that you understand how do personal loans hurt your credit, it’s also good to know how you can use personal loans to build up your credit. Here are tips to consider.
- Make Payments on Time – If you’re taking out a personal loan to build a credit score, you should make payments on time as this behavior is recorded in your credit report. After consistent loan repayment on time, your credit score will improve. To ensure you’re accurate on the repayment, you could set up automatic payments and reminder alerts.
- Diversify Your Credit Mix – There are different types of personal loans you could apply for. The most recommended for building a credit score is an installment loan, which you can repay in installments over an extended period.
- Lower Credit Utilization Ratio – The credit utilization ratio shows the amount of the current credit you’re using. To get a good credit score, you should keep credit utilization under 30% of the available credit.
Conclusion
A personal loan can be good for building your credit score. However, if you’re not responsible for the debt, it can spiral out of order and leave you with a bad credit score. Always repay your loans as required, as missed payments lower your credit score.
References
David Reed is a writer who hails from Austin, TX. He has written some great books like Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker, and more. He had a wildly prosperous career as a Senior Loan Officer and Mortgage Executive for over 2 decades. He is the Principal and the main writer for a group called CD REED Professional Writers Group. They specialize in the fields of online marketing, ghostwriting, content writing and SEO. They mostly work for industries that include the likes of Real Estate, Finance, and Mortgage. Reed has used his SEO expertise in writing numerous articles and even written copy for various websites. Reed is also an expert when it comes to finances. He brings his expertise to the table as a writer on the website yourloansllc.com.
Applying does NOT affect your credit score!
No credit check to apply.