Personal loans can affect your credit scores in both positive and negative ways. While taking out a loan is not bad for your credit score in and of itself, what happens next can be. Your overall score can be affected in the short term which makes it harder for you to get additional credit before you have paid the loan back.
It is also possible that the loan can boost your overall score if you pay it off in a timely manner. If you are going to take out a personal loan, you need to research and compare your options to find the best one for your situation.
Before you can understand how a personal loan affects your credit score, you need to know how your score is calculated. Lenders most commonly use the credit score created by FICO, the Fair Isaac Corporation. These scores will range from 300 to 850.
There are five factors that impact your score:
• Your payment history
• The amounts you owe
• Any new credit
• The length of your credit history
• The mix of credit
The importance of each factor varies among the three major credit rating agencies. If the FICO score is being used, the weight of each factor is:
• Payment history – 35%
• Outstanding debt – 30%
• New debts – 10%
• Length of credit history – 15%
• Mix of credit – 10%
Will a New Loan Application Affect Your Credit Score?
Based on the FICO credit score data, getting a new loan can affect your credit rating. When you have a new loan, you increase the amount you owe to others and add new debt to your history. Quick bridging loans are a speedy alternative when you need a loan fast.
New financial activities are something that credit agencies take note of. If you try to get a new personal loan after you have taken out a car loan, the application might be rejected. This is due to your credit score determining you have too much debt to handle.
It is important to remember that your overall credit history will have a greater impact on your credit score than new loans. Having a long history of paying debts on time and managing them correctly will lessen the impact of getting a new loan. The best way to ensure a new loan does not lower your credit score is to ensure you always make payments on time and within the terms of any loans you already have.
Can a Personal Loan Boost Your Credit Score?
Repaying your personal loan in a timely fashion can have a positive effect on your credit score. Doing this shows that you are debt responsible and know how to handle credit.
However, the people who are wary of taking on debt may have bad credit scores. If you never have any debt, you have no history of paying debt instalments. This leaves you with no payment history for your credit score.
What Credit Score Should You Have?
Credit scores from FICO range from 300 to 850. The higher the number of your credit score, the better it is and the more likely you are to be approved for a loan. Higher numbers can also mean more favourable loan terms and better interest rates. The exact score you should have for a loan will vary depending on the lender, but above 670 is generally considered the threshold lenders look for to determine creditworthiness.