Personal loans can be a great thing for many people and there really aren’t many downsides as long as you do the right thing and follow the guidelines of the loan. The best bit is, you can borrow money and in doing so significantly build your credit score, so it really is a win-win situation. This is really good for the future as it can help you significantly when you are looking to buy a house, open a rewards credit card, or borrow even more money.
However, while it may seem all good and well, personal loans can affect your credit score in many different ways, good and bad. If you can make all of your payments on time it usually represents a positive on your credit score. However, it is always a good idea to do your research and know exactly what can happen to your credit score if you take out a personal loan.
This way, you won’t be surprised if your credit score takes a turn for the worse or a different way in which you were intending for it to go. If bad credit is an issue, check out Personal Money Store for some guidance and help along the way regarding your credit score.
Loans and your credit score
People tend to think that their credit score is based on one thing, however, that couldn’t be further from the truth. In fact, your credit score is composed of a few factors that you may not have even known about. We all know credit scores can be fairly complex, but did you know that these things are what determine your credit scores? Here they are!
- New credit
- Payment history
- Length of credit history
- Credit mix
- Amounts owed
Better yet, here is how much they make up of your credit score:
- New credit- 10%
- Payment history- 35%
- Length of credit history-15%
- Credit mix- 10%
- Amounts owed-30%
Your personal loan can affect a variety of these things in different ways and at many different times, so it important to recognize them.
Finding a personal loan
Shopping around for a personal loan won’t affect your credit score most of the time, however, it is good to stay aware. This is because of the fact that lenders can run a soft credit pull to see what rate you qualify for. This won’t be recorded on your credit report as an official inquiry, so you will be fine in this instance.
While this sounds good, you must still remember that not all lenders will do this, so you must make sure beforehand that they will do a soft credit pull as opposed to one that will significantly affect your credit score.
Applying
When you apply for a personal loan, most people will experience at least a five-point drop of their credit score. This happens when you are ready to actually apply for your personal loan and your lender pursues a more detailed credit check which is also known as a hard credit pull. Your credit score will likely see a drop due to the fact that the pull will be recorded on the credit report as a credit inquiry.
Another thing to remember is that shopping for loans is considered a somewhat risky process. However, there is some good news involved and is it that credit inquiries only last for a short amount of time which means after a short year or two, it will stop negatively affecting your credit score. They will continue to fully disperse from your credit report after two years.
Repaying
Repaying your loan is perhaps the most important part of the whole process. You will be likely to see a huge boost in your credit score when you start successfully paying your repayments on time every month. The biggest factor of your credit score is your repayment history, and a bad one could get you in plenty of strife.
Your lender does plenty of checks to make sure that you actually pay your payments on time, however, if you don’t it will end very badly for your credit score. With each month that you make a successful payment on time, you will see your credit score rising. During this time, you will be at serious risk of messing up your credit score as well, so be very wary of that.
If you make a payment late or not at all, your payment score will dramatically decrease which can ruin a lot of things. How far it will decrease all depends on these few things:
- Frequency- If you continuously make late payments, it will continue to affect your credit score in a harmful way. The decrease may not be as bad if it is only a single time that you have missed or made a late payment.
- Time overdue- The longer your payment goes overdue, the more your credit score will take a huge hit. Payments get reported as late at 30 days overdue. The later the payment, the worse your credit score will become.
- Amount overdue- When you are due to make a payment and it goes overdue, it also depends on the amount you owe as to how much your score decreases. The larger the amount, the bigger the impact that your credit score will see and how much it will decrease.
Debt consolidation
If you have a lot of debt such as credit cards and any other personal loans you may have it only makes sense to consolidate them by taking out an even larger loan to be able to pay it off successfully. This will provide you with a few advantages such as:
- Your credit score will be improved
- You may be entitled to a far better interest rate
- You will only have to make one payment rather than many
A rollercoaster ride is what your credit score can be compared to when it comes to taking out a personal loan, it really is like visiting a theme park at times. Throughout the process, your score will hit highs and lows, so just stay prepared and all will be well.
When you apply for a personal loan or a title loan, the lender will use your monthly income to approve you for the loan.