Financial Future: How Can a Loan Affect Your Credit Rating?

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Your credit rating is an extremely important part of your financial freedom. Having a good credit score unlocks better deals for you in terms of mortgages, credit cards and loans. You can get better rates and therefore borrow more money, with less interest to pay

Of course your credit is affected by many different factors, and will usually be moving either up or down depending on your financial habits. One of the factors that affects your rating are loans and loan applications.

With more and more people turning to personal loans, it’s important that you understand how a loan can affect your credit rating. Let’s take a look.

The Application Process

Simply applying for a loan is enough to affect your credit score. When you apply for a loan your credit file is accessed and checked by lenders. This is because a small part of your credit score is calculated based on how many credit applications you make. As a loan application is the same as a credit application, your score will take a slight hit when applying.

The bad news is this can mean a bigger hit to your credit score if you try multiple applications in a short time. The reason for this is if lenders see multiple applications in a short time, they will think you’re in a bad financial position and really need the money.

On the other hand, some type of loan applications give you a grace period. During this time you can shop around with other providers without taking any further hits to your credit. These types of loan include auto loans and mortgages, as it’s expected you would want to shop for the best rates in these situations.

Reviewers such as can help to provide information on specific lenders for the application process. It’s a good idea to use this information so that you aren’t applying for loans which you won’t get anyway. After all, there’s no point taking a hit on your credit rating for no reason.

Making Payments

Keeping on track with your payments is probably the biggest way to help your credit score. Timely payments will keep the score increasing, whilst late or missed payments will cause it to fall. Missing payments can also lead to a downward spiral as late fees and interest are charged, plus you still have to make up the payment before getting back on schedule with future payments too. This can be a big ask!

Your score might also need you to make a lot of timely payments just to undo the damage of one missed payment.

Loan Balances

The final way a loan hits your credit score is determined by how much you owe. Owing a large balance compared to your income will hit your credit a lot more than owing a small amount. Your debt-to-income ratio needs to be kept as low as possible if you want to help your credit score, so those who are already in debt will have the toughest time getting attractive loan rates.

By combining the above factors you see the most attractive borrowers owe less, have a good payment history, and aren’t too eager to get a loan. This may sound contradictory, yet obviously a borrower with bad history, who owes a lot and is desperate for a loan sounds like a risky proposition for many reasons, so it’s easy to see why these things affect your credit score.

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