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.