In society today, having no credit is nearly just as badly in your life as having bad credit is. Without some form of history, you’re less likely to get approved for apartments, rental contracts, car agreements, and other forms of significance financial value. Building credit is something that everyone must start doing at some point, but the biggest question still remains:
How do you go about building that credit to get credit the smartest way possible? One very valuable option is applying for a loan, and this can also work to help improve an existing score. Here we will discuss the most common questions borrowers have about how a personal loan can affect credit scores.
Do Personal Loans Affect Your Credit Score?
Any time you borrow money in a professional capacity, it will affect your credit score. However, this does not mean personal loans will hurt your credit. You can control the affect a loan will have on your credit score with some careful planning and organization.
How Do Loans Help Credit?
Old World rules used to be that borrowing money was bad at any time, but it’s changed drastically in modern times. By proving you have the ability to exercise willpower and self-control by presenting a good credit score, you’re giving yourself a reliable reputation.
This is where a personal loan steps in. There is 3 main ways that a loan can actually help improve your credit score overtime if you stay responsible with your payments.
- They improve your credit mix score.
Though it isn’t a large percentage of what is calculated in your credit,having several different types of credit shows your ability to handle different types of situations and payments. For example, if you’re making payments on-time for both a loan and a credit card, your credit mix score will go up, and bring your overall score up a bit, too.
- Loans that consolidate credit card debt and remove that negative impact on your score.
Personal loans can be used for a plethora of things, but one common choice that many with poor credit make is to get a debt consolidation loan. Not only does a loan help pay off outstanding debts and eliminate high interest costs from cards, but doing so can improve your credit score by reducing the amount of overdue credit lines open. With all of your debt condensed into one factor, it won’t have such a drastic impact on your overall score.
- Adds to your payment history with an open line of credit.
It’s recommended to only use about 30% of less of what you have available in total throughout all lines of credit. The less you use compared to the amount you have open, the better your score becomes. As you continue to pay off your loan, you will be reducing that usage amount, and you’ll see a positive impact on your credit score if you keep up with payments.
Can Applying For Loans Hurt Your Credit?
A personal loan hard inquiry will affect your credit score, but minimally. The only time you really have to worry about inquiries creating a drastic change in your score is if you’ve applied for several lines of credit at once. Scores with over 6 hard inquiries on their record are at a higher risk for facing rejection in the future when it comes to financial assistance, but companies are also very understanding when it comes to necessities such as student loans and mortgages.
Another thing you should always keep in mind whenever borrowing money is that any missed payment will result in a negative impact on your credit score. Building credit is done by reliability and a history of following through.
Mistakes happen, but too many will tank your credit fast, and it’s hard to come back from that. So, while applying may have a minimal effect on your score, make sure you’re prepared to return the amount you’ve borrowed appropriately and only take out what you can afford.
The Differences Between a Loan VS. Credit Card
When it comes to both building and fixing credit, there is a bit of a conversation regarding which method of credit gets the job done the best. Both offer very solid pros and cons and it depends on the needs of the borrower.
Credit cards have higher APR than loans, and less amounts available at a time, but they can be used again and again. For multiple small amounts that occur and change monthly, credit cards can be useful in building credit, but it’s not going to get you far if you’re trying to restore a previous position in your score.
Loans are best for large financial obligations and are usually taken out with the understanding that it will take time to repay the debt. If you apply for a loan over a credit card, you’re making this choice because you know you need the wiggle room their relaxed interest rates give you when compared to credit cards.
Many people have both for different parts of their life, depending on where they are at in their progression and their immediate needs. Familiarizing yourself with the differences and comparing them to the benefits they offer your current financial state can help you decide which will be the most helpful to your credit score.
Do You Need More Personal Loan Help?
Getting every question answered about the exact affect that a personal loan will have on your credit score can be a tricky mission since every situation is vastly different from the next. Loan companies are in position to be accessible to you and can give some clarity to any additional questions or concerns you may have.
Don’t ever be afraid to ask questions that you’re unsure of anytime you sign any lending agreement to avoid making mistakes that have a long-term impact on your financial security. The last final things to remember when it comes to how loans can affect your score are these:
- The more you pay off, the more your score improves
- A history of on-time payments matters more than the amounts borrowed