The Link between A Personal Loan And Credit Score

A personal loan can have a huge impact on your credit score. It is possible that a loan which is fully paid-off on time could provide you with a better credit rating but if you miss payments, it could have a negative effect on your credit report. There are many factors which you should consider when deciding whether to take out an instant loan, but how could it affect your credit score?

Let us recognize the ways a personal loan can influence our credit score.

Developing a better credit mix

Diversity in credits is known to improve credit score. A personal loan is usually paid off in regular instalments (normally on a monthly basis). Thus, a personal loan can enhance your credit mix when the majority of your loan is revolving credit, ex- credit card.

Develops a good payment history

Regular payment of loan instalments creates an excellent payment history which can eventually improve your credit score. Make sure that you pay your instalments on the same date every month otherwise you could find yourself paying more back in the long run and risk having your credit score tarnished.

It can leave an inquiry on your credit report

Every time you apply for any kind of credit, the lenders perform a credit check on you. There are two types of credit checks, hard and soft. A hard credit check will leave an inquiry on your credit report which is visible to other lenders when they are making future credit decisions should you apply for credit further down the line. A soft check however will not impact your credit score or leave an inquiry whatsoever and therefore other lenders cannot see when a soft check has been performed. If you are trying to get a loan with a poor credit score, or no credit history at all, you might wish to consider a credit builder loan to help improve your credit, which will in turn help with any future financing you may apply for.

A hard check will usually occur during the decision-making part of an application compared to a soft check which is usually at the preapproval stage.

It can deepen your debt

Personal loans should only ever be used as a short term solution to get your long term finances back on track. You should never rely on frequent loans and if you have developed the habit of taking personal loans to pay off higher-interest debts, then you must rethink your strategy. Constantly paying credit with more credit will eventually lead to more debt, higher repayments and possible financial instability. Therefore, only borrow what you can afford to pay back and if you ever feel like your debts are spiraling out of control, seek free independent debt advice.

It will lead to additional fees

You will be paying the interest in your loan, but some lenders could also be charging for things such as late fees. Read the documents before accepting the deal as hidden charges can cause major bumps in your budget.

You should always think carefully when it comes to any form of credit such as loans. They will usually have either a positive or negative effect on your credit report. Therefore, you should always make sure that you only take credit when you know you can pay it back in full and in the dates agreed.

Author: Oliver Curtis

Hi there. I’m Oliver. I’m just a young boy from the outskirts of… Okay, that’s a lie, I’m not a young boy anymore, although I certainly feel that way at heart.