How Loans Impact Your Credit Score

While opting for a loan, the applicant is required to sign a contract agreeing to pay a fixed payment that will cover the loan in due course

. And the belief or the trust that the applicant will pay back the amount is called the Credit. When lenders believe that the applicant will repay the amount, then the applicant is said to have a good credit.

If you are borrowing money, lenders agree to lend the money believing that you will fulfill your financial obligations on time. And this belief is usually based on your credit score. The credit score is a numerical expression based on statistical analysis of a person's credit files, which represent his/her creditworthiness. It is based on information obtained from credit reports sourced from credit bureaus.

Therefore a good credit score is a guarantee for the lender. When you have a bad credit, it is an indication for the lender that you might not pay back the money on time.

Loans & Credit Scores

Credit scores are qualifying points for approval of a loan. Always remember that borrowing a loan also has an impact on your credit score. While applying for a loan can decrease your credit score, timely payments tend to increase it.

It is noteworthy that 10 % of your credit score arises from the total number of credit-based applications made. Hence, each time you apply for credit, an inquiry is positioned on your credit report. Therefore, several inquiries can indicate that more loan debt is taken than what you can handle. However, a mortgage loan or an auto loan has grace periods during which loan inquiries do not affect your credit score. So it is important to keep in mind that timely loan payments have a positive impact on your credit score and can attract potential lenders.

Likewise, high loan balances can also affect your credit score by bringing it down. The trick to a better credit score however, is to maintain a large gap between the original loan amount and the current loan balance. As you pay your balance down, your credit score increases.

Income is a major factor that determines an individuals ability to repay a loan. Your debt-to-income ratio is therefore compared to all your loans and credit cards. And a high debt-to-income ratio is capable of rising the credit risk and lowering the credit score. Hence it is essential that you reduce inquiries and make payments on time to maintain a good record.

Therefore, if you are unable to manage your credit score effectively and you wish to understand the effect of loans on credit scores, you can opt for debt management credit counseling. A representative from Debt management counseling agency can give you a better idea of how credit scores can be maintained at an appealing level despite your loans and other debts.

by: brianwarren

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