A credit score is a number that lenders consider before lending you money. Your credibility depends on your credit score. The better your credit score, the more credible you will be considered.
Most lenders, like mortgage bankers, auto companies, and credit card companies, consider your credit score before assigning you a loan. This is why your credit score plays an important role in your financial stability.
However, having at least an 800 to 850 credit score is above average and can help you with your next credit. Therefore, try to maintain your credit score as much as possible.
Loans are helpful in every situation and circumstance of life. However, there is no mystery to the fact that borrowing a loan can affect your credit score. Do you want to know how? And which type of loan can affect your credit score? Keep reading the article till the end.
But before jumping to the impacts of different kinds of loans on your credit score. Let’s understand the anatomy of the credit score.
Anatomy of a Credit Score
According to FICO, the credit score is composed of five factors. Let’s have some know-how about these factors.
- Payment History
Your payment history shows how responsible you are for repaying your debts on time. It is one of the most important factors in building a strong credit score.
- Utilization of Credit
Another important factor is credit utilization. It means how much available credit you have used.
- Credit History Length
The next factor is the length of credit history. It means how long you make repayments on time. The longer your repayments are on time, the better your credit score will be.
- Fresh and New Credit
Your credit utilization ratio can be improved by obtaining fresh credit. However, only open new accounts when necessary. For instance, applying for several credit cards simultaneously may harm your rating.
- Credit Mix
A credit mix is the variety of credit accounts you have, such as loans, credit cards, and mortgages. It is one aspect that is typically considered when determining your credit scores.
- Impact of Personal Loans on Your Credit Score
Personal loans are loans that you can use for anything. Some people use personal loans for their wedding preparations or even for home renovation projects. However, you can also use these loans for your emergency expenses. In short, personal loans can be used for anything you choose.
Now the question comes, “How will personal loans affect your credit score?”. To your surprise, a personal loan can affect your credit score in both good and bad ways. Let’s suppose you are making all your repayments on time. Then the result will be, of course, positive.
However, in other cases, like late payments, it will hurt your credit score.
- Impact of Auto Loans on Your Credit Score
Auto loans are loans that one can borrow to buy a car or a truck. This type of loan is considered a secure loan as the vehicle itself is considered collateral. It simply means that the lender can repossess your vehicle if you fail to repay on time or stop making repayments.
Now let’s discover how auto loans can affect your credit score. When you visit an auto dealer for a car loan, they will run a credit check on your credit report. This credit check would be considered a hard inquiry, lowering your credit score to 5-10 points. But don’t worry! It is just for a year.
You should not claim an auto and a home loan simultaneously. Claiming both loans in a short time will reduce your credit score to 20-30, which is not good for your next credit.
Fortunately, any brief drops in your credit score will eventually disappear. But as long as you keep making timely payments, the benefits will endure for the duration of the loan.
Your credit mix, which accounts for 10% of your credit score, can also be improved with a new auto loan.
- Impacts of Student Loan on Your Credit Score
A student loan is money you lend for your college fees. You can claim these loans from any private lender or your local government. You have to pay back this loan, including the interest rates. The rate of interest on these types of loans increases with the passage of time.
Some students claim this loan to fulfill their study expenses. Some students also acquire this loan for a trip anywhere during their spring break. However, student loans can affect your credit score in both good and bad ways.
Student loans can either positively or negatively impact your credit score. Still, the good news is that you can minimize the negative consequences by making on-time payments regularly.
You might be able to qualify for a cheaper interest rate through student loan refinancing when you take the time to improve your credit.
- Effects of Mortgage Loans on Your Credit Score
A mortgage loan is a loan used to purchase a new home. Your property acts as collateral in these kinds of loans. In simple terms, the lender has the right to repossess your property if you stop repayments. In most cases, mortgage loans have a repayment time of 10, 15, 20, or 30 years.
However, a mortgage loan can affect your credit score. When you apply for a mortgage, the lender will have to perform a hard inquiry on your credit record, which could initially lower your credit score.
A hard inquiry is not only used when dealing with mortgages. It is also used if you apply for a new credit card, personal loan, auto loan, or any other type of credit. A hard inquiry can lower your credit score by a few points, whether you are approved or denied for a credit card, personal loan, or mortgage.
Even if you are approved for a mortgage, your credit score may decline. You can rebuild it by consistently making on-time, complete payments on all of your expenses each month, including your mortgage. This is so because your credit score is 35% based on your payment history.
Taking Away
In a nutshell, any type of loan can affect your credit score in both good and bad ways. However, your responsibility is to keep your credit score high and perfect for your next credit purchase. As hard credit checks can lower your credit score temporarily, paying your bills on time can boost it up quickly.
So always try to maintain your credit score as much as you can. However, some credit repair companies can help you repair your credit if needed.