What to Know Before Taking Out a Loan That Could Hurt Your Credit Score

Hold on for a few minutes before putting your signature on that new loan. Are you sure about what you’re about to do? Do you know what could happen if you’re unable to make payments on it? Moreover, if you can’t do it on time?

What do you need the money for?

Chances are your focus at the moment is on what your plans are for the loan once you get it.

Loans and holidays

Photo by Chris Lawton on Unsplash

Do you want a fantastic holiday? Are you ready to redesign your home and interiors to look just like your Pinterest boards? Are you ready to launch your business and need propertyYou are not alone. The top 5 reasons people take personal loans include:

  1. Launching a business
  2. Consolidating existing debt
  3. Enhancing education
  4. Buying a new car
  5. Paying off bills

While the first, launching a business and needing commercial property and enhancing your education are legitimate and promise you more money. The others could already be red flags about your ability to manage money, and you should think twice before taking a new loan. 

At this stage, it’s possible you’ve decided you’ll work out the “how” later on. In fact, most people who take out loans often think that way. However, your credit score will suffer in the long run if you can’t make the payments on time. It gets worst if you cannot make the payments at all.

How a loan can affect your credit score in a bad way

Failure to make your payments on time and non-payment will cause your credit score to drop fast. You might become less attractive to lenders in the future. The key takeaways here are that:

Your credit history shows every loan and the amount of every monthly payment you need to make. If you plan to take out a new loan on top of your existing debt, lenders use debt to income ratio (DTI ratio) to determine if you can still afford it. Ideally, your DTI ration should be less than 36%.

You should also be aware that cosigning a loan also affects your credit score. In fact, lenders also take this into account on your monthly expenses.

Hard inquiries can cause your credit score to dip since this shows lenders that you need more resources. If you’re planning to take out a new loan, you should know every lender you talk to will assess your credit. A few lenders can perform pre-qualifications and make soft inquiries which don’t show on your credit score. Too many investigations, can be damaging and indicate you’re in financial trouble.

Shop and compare deals among lenders within a limited time frame:

  • Accomplish your applications for a mortgage with 30 days or less, be sure to include your comparison of lenders within this period.
  • Complete car loans in two weeks.

Student loans can hurt your credit score

Your student loans can damage your credit score. No doubt, it’s the reason why millennials are willing to forego their right to vote in the future just to be free from it. So, just how bad can it get? If you’re late by as much as 30 days, then it’s marked on your credit report and stays there for seven years. A mark remains on your report forever if you fail to make payments at all.

Payday loans can also hurt your credit score

Payday loans can be helpful when you’re in a bind, but you should take them as a last resort, not just to get a bigger screen TV, a new wardrobe or the latest iPhone. Out-of-pocket home bills or covering for the damage of a water leakage are reasonable reasons to consider such a loan. However, if you do it often then it would reflect on your credit history. Moreover, it would imply you might be having problems with your finances if you take out one a great deal. Here are some tips to remember before taking out a payday loan.

How a loan can affect your credit score in the right way

Admittedly, the effect of a loan on your credit score isn’t all negative. In fact, it can even help raise your credit score provided you’re able to pay for it. Moreover, do this on time. You should be aware how significant your payment history is to your overall credit score. In fact, it makes up 35% of it.

When you’re able to make your monthly payments, then you’ll be more appealing to lenders because it shows you’re responsible for handling your debts. As a result, you’re able to build up your credit and be regarded as less of a risk.

Conclusion

Obtaining a loan per se isn’t bad. In fact, doing so can improve your credit score for as long as you’re able to pay for it on time. Of course, you could feel this is the only way to have all the money you need to full-fill your childhood dream of traveling the world. Yet, as a responsible adult, you should first map out a detailed repayment plan and make sure the monthly installment is within your financial power. In fact, you could take smaller loans, for example, to redecorate one room to build up a good credit score. Once you are past 700, you can begin planning to make a personal loan at a much lower rate so that you can enjoy the outcome without worrying about the payments.

holidays loans

Photo by Chris Lawton on Unsplash

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