Will a Loan Help or Hinder my Credit Score?

Our credit score is a figure that potential lenders as well as some other, will use to judge our financial situation. A poor credit score could lead to us being turned down for loans or rental agreements and a good credit score will not only help us in those respects but may even allow us to borrow money at a lower rate. This means that having a good credit score can be really important and it is worth being aware of the different things that might change it.

How could a loan affect credit score?

A loan could have either a positive or negative affect on your credit score. This means that it can be difficult to know whether taking one out will be a good thing or not. It is worth understanding how a loan might be good or bad and then you can decide whether it will be a good or bad thing for you.

How a loan could help credit score

If you get approved for a loan then this is already a positive thing for your credit score. Other lenders will see that a lender is willing to lend money to you or were willing to do so in the past and this might make them more confident in doing so.

If you make all of the repayments on the loan on time, then this will prove that you can be trusted to do this. It will mean that lenders will have more confidence in lending money to you again. This can help you when you want to apply for another loan in the future. However, if you do not manage to keep up with other payments such as rent or utilities then this will show on your credit record, so make sure that you are keeping on top of everything else as well as the loan.

How a loan could hinder credit score

If you apply for a lot of loans before you get accepted for one, then this will be reflected on your credit rating. So, the fact that lenders have turned you down will be there and this could lead to other lenders feeling that they should not trust you either even without properly checking your details and thinking about why you may have been turned down. If you choose a loan where no credit check is needed then they may conclude that you did not think you would get a loan that required it and again may not trust you even if they have not checked you out themselves. If you have a lot of loans, this may also put them off as they may question whether you would be able to cope with the repayments on another one.

If you do not manage to make the repayments on the loan, then this will go against you. Lenders will usually feel that they will not want to lend to you because you may end up not repaying their loan. However, this may depend on how many repayments you miss. If it is only a couple they may not mind so much as they may be happy to take you on and hope that you default on a few payments so that they can get more money out of you.

So, when you are taking on a loan you are taking a risk that you could reduce your credit score, but there is also a chance that it could also improve. It is therefore wise to think about whether you will be able to afford the repayments on a loan. Both for the benefits of the credit score and to make sure that you do not pay more than necessary, it is best to only enter a loan agreement if you are confident that you can cover all of the repayments. It is wise to carefully calculate this and not just guess or assume anything. Check out what you normally pay out and how much you earn and calculate the difference. If this is more than the amount that you will have to repay on a loan each month then you can afford it. Otherwise you cannot afford it. You might be able to make some changes to how you spend or budget better in order to afford the repayments but you will need to be committed to doing this throughout the loan to make sure that you are able to repay it. Make sure that you are coming up with realistic ideas. It can be tempting to convince yourself that you can afford a loan because you so desperately want the money that will come from the loan. It can be wise to show your calculations to someone else who is not so emotionally attached to the idea of you having extra money and they could help you to see whether your ideas are realistic or not.

Should I be a Guarantor for my Child’s Loan?

If you child asks you to be a guarantor for them in a loan that are taking out, then you could have a tricky decision to make. You will want to support them, but may worry about them having this loan. It is worth taking time to consider different factors so that you can make the right decision.

 Is the loan right for them?

It may seem rather patronising for a parent to sit down with their child and talk through the reasons that they are wanting to take on a loan. However, if you, as a parent, are going to be involved then you should know why. You might feel that they could cope without the loan and if they did not have it, then it could save you and them a lot of hassle as well as money.

Is it the right loan type for them?

It is worth talking through with them why they decided on this type of loan. As this is one of the only options available for those with a bad credit rating, then this is likely to be the reason why. If this is not the reason, then there may be other loans that they could take. Make sure that they have looked at the costs of different loan types and considered whether they are suitable options for them. If their credit score is poor, then they may still be able to find other loans. You could do some research together just to make sure that this type of loan will be the one that will be the most suitable for them.  

Can you afford to be a guarantor?

You need to consider whether taking on the role as a guarantor will be something that you can afford to do. It is worth imagining the worst-case scenario that you have to repay all of the loan as your child defaults on every repayment. Make sure that you know how much you will be expected to pay each month (bearing in mind it could be more than the repayment your child is paying due to the admin costs of requesting the repayment a second time). Consider whether you will have enough money each month to afford it and even if you have, what you would otherwise have liked to have spent that money on.

Do you want to be a guarantor?

You then need to think about whether this is something that you want to do. Of course, as parents we want to do the best for our children. When they ask us to help them, we will want to do all that we can to help. However, helping them out financially can be tricky, especially when they have left home. If you have more than one child, then you may feel that you need to help each out the same and therefore it could cost you a lot more money than those loan repayments as you may need to pay out double, triple or whatever, depending on how many children you have. You may also find that there could be jealousy between the children if you help out one and not the other which could either effect your relationship with your other children or the relationships the siblings have with each other. You may also want to consider what effect being a guarantor might have on your own credit score as you will be associated with your child who presumably does not have a good credit rating.

What other options are there?

It may be better to help them out in other ways. You might be able to help them sort out their finances so there is no need for them to get a loan. You may be able to lend them the money yourself or perhaps even give them the money. Of course, you may not be in a position to do that but if you can just give them some help with budgeting or other financial advice then this might be enough.

It can be difficult to say no to your child and not help them but if you fear that you may struggle financially, it could affect relationships in the family or you do not agree with them taking the loan then this is what you will need to do. It will be hard and they may not appreciate it but of you can have a discussion with them about your reasons for not doing it, then this should help. If it is hard to tell them that you do not agree with the reasoning for taking the loan, it may be better to lie and pretend that you cannot afford to help them as this is not a reason that they could argue with or be upset by unless they know that it is untrue.