How Loans Impact Your Credit Score

If yours is, it could be taken into account when calculating your credit ratings.

Personal loans

could be reported to credit reporting agencies, meaning that a personal loan could hurt or help your credit ratings. Taking out a personal loan isn't bad for your credit score in and of itself, but it can affect your overall short-term score and make it harder for you to get additional credit before the new loan is repaid. Applying for a personal loan can cause a five-point drop in credit score for most people, as lenders perform a more detailed credit check known as “strong credit extraction” when you are ready to apply.

This is recorded on your credit report as a credit inquiry, and because buying loans is a somewhat risky activity, your credit score generally drops a few points accordingly. On the other hand, a personal loan can increase your credit mix, which can also increase your credit score. The different types of financial products make up your credit mix, which represents 10% of your credit score. A diverse mix of credit cards, loans, and other accounts can boost your credit score.

When you apply for a personal loan, you add debts to the total amounts owed. This will likely lower your credit rating in the short term, as lenders may consider you a higher risk due to the higher debt burden associated with taking on more than you can handle. It's important to note that late or late payments negatively affect your credit rating more than any other factor, since payment history represents the highest percentage of your credit score (35%). Just because you owe money doesn't mean you're considered a risky borrower and won't sink your score, but high credit account balances and the presence of loans with large balances to pay can negatively affect your credit.

Additionally, a thorough consultation can have a negative effect on your credit score and stay on your credit report for up to two years. When considering taking out a personal loan, carefully evaluate the pros and cons and honestly analyze your own financial behavior to decide if it's right for you. Buying with lenders is a smart way to get a good deal and minimize the impact of the credit crash by making all purchases in a relatively short period. As long as you can manage them well, lenders like to see that you can handle multiple types of debts, and you are rewarded for it with a better credit score.

Some borrowers have found that when they finally pay off a long-term loan, such as a student loan, their score can take a small hit.