Any type of loan whether it is personal, consumer, home, auto, education or any other will be granted on the basis of your credit report. Not only that, the way you manage your loans and pay it back will also determine the health of your credit. Therefore, know about the relation between loans and credit scores and make an immaculate plan to avoid falling into the vicious circle of debt. Carefully and meticulously managed debt can be very useful but for an unplanned debtor a debt can turn out to be a black hole.
A loan is that little extra money that everyone wants to fulfill their dream but as long as it is ‘little’ and within the manageable limits it will be beneficial with a few minor inconveniences sometimes if at all. But when you cross your affordable limit it will surely turn into a major catastrophe and start affecting your credit score.
Benefits of personal loans
There are several benefits of taking a personal loan. Such loans can help you to smooth over the rough spots in your financial life. With such loans you can even pay for a large and otherwise unmanageable bargain. Apart from that, personal loans are unsecured which means you will have cash available from other sources to manage your financial obstacles but not have to worry about any collateral. The only thing at stake is your credit score and credit report for which you must take special care of.
At times when you have too many personal loans and other debts and obligations you may find it difficult to cope up with the monthly bills. Mental stress will creep in affecting your health and relations and collection calls will start pouring in along with reminder letters and occasional doorbells to answer and meet the debt collectors.
All these will affect your creditworthiness and credit score. In turn it will reduce your ability to get a loan in the future. Reliable and reputable lending companies may offer debt consolidation loans and even help you in debt settlements but care must be taken before you visit as everything has its characteristic pros and cons.
Factors that affect credit
There are different credit factors that will affect your credit score when you avail a personal loan from a bank or any money lender. This will in turn cripple your borrowing status. You may not know that even applying for a loan will affect your credit score leave aside getting one. Therefore, it is important that you know about all of these credit factors that are usually and most commonly scrutinized by money lenders and even banks. In short your credit report will influence the lender’s decision about your loan.
To understand well about the credit factors you must first know how your credit score is calculated. FICO credit scores are the most commonly used ones by the money lenders to determine your creditworthiness. There are different factors that will affect your score and all these factors have different weights, such as:
- On-time payments of your loans to past and present lenders will account for at least 35% of your FICO score. If you do not have a robust credit history even a few missed or late payments will therefore have a big impact on your credit score.
- The outstanding amounts of your loan accounts to other lenders will also carry a lot of weight in your FICO credit score which is about 30% of the entire score.
- The age of your credit reports and history will also have an impact on your credit score by as much as 15% of it. Shorter credit histories are usually considered to be less attractive by the lenders because will not prove your ability to manage debts for a longer period of time and you may crumble under unfavourable situations.
- Each and every new account opened by you will also affect your credit score and the age of your credit history. In this aspect, the creditor will consider all your open accounts and combine them to see how long these have been active dividing it by the total number of loan accounts in your credit report. These new accounts will figure about 10% of your FICO score. More new accounts will lower your score raising red flags with the lenders especially if you open too many new loan accounts at the same time through https://www.libertylending.com/or through banks.
- The type of credit account that you currently have will account for 10% of your FICO score. This is called the credit mix in the financial market and involves a wide range and variety of financial instruments such as installment loans and revolving credit card accounts. If you have too many loans of a single type will also hurt your credit score.
When you approach a money lender for a personal loan it is most likely that the lender will look at the age of your credit history as well as the number of new and recently opened credit accounts on your credit report.
Inquiries conducted on your credit report
A credit report is highly descriptive but it may not be as explicit as desired by the money lenders. There may be a few credit inquiries that will not show up on your credit report. These are called the “soft inquiries.” These inquiries are typically carried out when any other lender or a credit card company gives you a pre-approval notice.
On the other hand there may be a few credit report inquiries that can be termed as ‘hard inquiries’ as well. These are required for credit card and personal loan applications. These are typically done by the money lenders when they see that you have been denied repeatedly by other money lenders and banks.
Such inquiries can be for about five points per instance but these can seriously affect your credit and chances of getting your loan application approved. It is therefore recommended that you do not make or be cautious about frivolous credit applications.