Can Applying for Loan Lower My Credit Score?
A loan is a process in which one party (lender) agrees to lend money to another party (borrower) in exchange for a promise to repay the amount in future. Not many borrowers are aware of the fact that a loan can have negative as well as positive implications on their credit score, which in turn may impact the borrower’s potential to apply for other financing options. If you are planning to take out a loan anytime soon, you need to read this guide to know how a loan will affect your credit score.
Relationship Between Loan and Credit Score
A lender lends the credit to a borrower on the basis of trust or the belief that the borrower will repay the amount on time. A borrower is said to have good credit if lender lends the loan and believes that the borrower will repay it on time. On the contrary, a poor credit history implies that the borrower is not likely to repay the loan on time. If you have taken out a loan when you already have a poor credit history, it pushes your credit score further down.
Let’s see how taking out a loan impacts your credit score.
A Loan Application Affects Your Credit Score
Applying for a loan can lower your credit score by a few points, as 10% of credit score is based on credit-related applications filed by the borrower. Every time you apply for credit, an inquiry is placed on your credit report. This means the lender has reviewed your credit report before lending the credit. The increase in the number of inquiries on credit report indicates that you are desperate to get the credit or you are taking more credit than you can actually handle.
Nevertheless, if you are contemplating on a home loan or auto loan, you have a grace period during which the increased number of inquiries do not affect your credit score. This grace period varies from lender to lender.
Timely Payment Increases Your Credit Score
The manner in which you make payment has a substantial effect on your credit rating, as 35% of your credit score is based on the pattern of repayments. That’s more than any other factor used to calculate the credit score.
Timely loan payments help you improve your credit score making you an attractive potential borrower. On the contrary, any lag in the loan payments can damage your credit score making you an unattractive borrower.
High Loan Balances Affect Your Credit Score
After you take a loan, you pay the balance in installments. The higher the loan balances, the more severe the impact is on your credit rating. It means the smaller the gap between original loan amount and the balance, the worse will be your credit score. Nevertheless, you gain the score the moment you start paying off your balance. Therefore, never delay in paying off the balance.
A potential borrower is one that has good credit history. Clearly, a loan can negatively or positively impact your credit score and if your credit score curve is tending more towards the negative side, it may render you weak for other financing options. Nevertheless, you have a provision for credit repair to improve your credit score. Seek professional assistance for better understanding of the provision.