You are using an unsupported browser Please switch to a supported browser so you can get the best experience on this site
Need Help? Contact Us or Live Chat
Couple reading paper on How Loans Affect Credit Score

How Do Loans Affect Your Credit Score?

Loans are one of the most significant factors that affect your credit score. They show your tendency to pay back the money you borrow, help show a diversity of credit types, and, after some time, provide positive credit history. 

It shouldn’t be a surprise to anyone to hear those loans affect your credit score. But if you want information on how, why, and how you can use them to your advantage, continue reading this article.

What Are Loans

Loans are a large sum of money you can borrow from a banking institution that will front you the cash right away to use on big purchases, and you are required to pay the borrowed money in monthly installments.

While there are many different types of loans available today, like mortgages or vehicle loans, personal loans are not based on one specific purchase, meaning you can use the money however you would like as long as you are making your monthly payments.

Types of Personal Loans

There are a few different types of personal loans available today, helping people in many different situations get the money they need when they need it. 

Installment Loans

Installment loans are the most common forms of personal loans frequently taken by borrowers. This is a loan where you are provided with an amount of money and sign an agreement that you will pay the amount back in monthly payments.

Each monthly payment is set for the same day and will pay off part of the money borrowed. These payments are made for each scheduled date until the loan is fully paid off.

Find out more information about installment loans by visiting our Installment Loans page.

Lines of Credit

A line of credit type of loan is perfect for anyone who is making home repairs, booking a big vacation, or buying new furniture.

With this specific loan, you are given a set credit amount you are qualified to borrow from. You do not need to spend all of the money, and you can use it at your convenience. If something comes up and you have access line of credit, you can borrow from it.

Read more information about lines of credit by visiting our Lines of Credit page.

How Do Loans Affect Your Credit Score?

Loans play a huge role in credit scores and can be largely impacted depending on your loan history. Past approved loans, rejected loans, loans that are paid off, loans that are delinquent, etc. There are a ton of different ways loans can help your credit.

How Do Loans Positively Affect Your Credit Score?

Taking out a loan can be a great way to establish good credit and improve your chances of taking out bigger loans in the future, getting lower interest rates, being approved for betting credit cards, getting approved for a nice condo, etc.

Credit is looked at in a few different ways throughout your life and paying your loans on time can really increase your credit score. Here is a list of how loans help your credit out.

Lowers Credit Utilization Ratio

Credit companies will often look at your current credit that is out compared to credit available also known as your Credit Utilization Ratio. If you are utilizing loans such as a line of credit loan, paying it on time all the time will show you have plenty of credit available but you’re not using it. 

Contributing to a Good Mix of Credit Lines

Another factor that can increase your overall credit score is a good mix of credit going out. If all you have are a few credit cards, your score won’t be nearly as high as if you had a few credit cards, a mortgage payment, and a personal loan.

Helps Show Good Payment History

Lenders have access to your credit reports and can quickly see whether you have paid previous loans on time all the time and whether or not those loans had been paid off. 

If you take out a personal loan and make sure to make the correct payments every month, your credit score is going to increase, and other lenders will feel they can trust you to borrow from them.

How Do Loans Negatively Affect Your Credit Score?

When you are preparing to take out a loan, always make sure you are doing it for the right reasons, you have the funds to pay it back, and you have a plan in place.

Missed Payment 

Missing a payment on a loan is one of the worst things you can do to your credit score. Even one missed payment can show as delinquency, and other lenders who see this will assume you cannot be trusted to make your payments on time.

How to Use Loans to Improve Credit Scores

You can use loans to improve your credit score by finding a company that is willing to provide you with a small loan amount and making sure to never miss a payment.

When Should You Take Out a Loan?

There are many reasons for you to apply for a personal loan that can help you out with a big item purchase as well as improve your credit score.

Consolidate High-Interest Debt

If you have a few credit cards that have high-interest rates keeping you in that horrible cycle of making monthly payments that don’t even touch the actual balance, obtaining a personal loan to pay them off is a great way to pay those off and help your credit.

Doing this will boost your credit score because it will free up a lot of credit, and it will show good payment history. 

It will also reduce the amount of money you have going out each month by only requiring you to make one payment.

Emergency Situations

There are times when emergencies happen, and you just don’t have the savings to cover the costs. Appliances get old, furnaces blow up, and pets get sick or injured. These problems can create a high-cost fix, and access to quick loans is a good way to take care of it with little to no stress added.

Home Improvements or Repairs

Improving or repairing your home is a big financial burden and can cost a pretty penny. You can easily accomplish these jobs and only pay small monthly payments instead of breaking the bank at one time.

Why is Monitoring Your Credit Score Is Critical?

These days there are many ways you can easily monitor your credit score or even obtain services to do so for you. There are a lot of reasons you should always keep a close eye on your credit and make sure it is where it should be.

Credit and Identity Theft

One of the most obvious and essential reasons to continually monitor your credit is the recurring worldwide issue regarding identity theft. 

Criminals are finding more ways now than ever to hack into systems and computer files, obtaining personal information, including your credit score.

Many people don’t realize their credit has been used until it is too late and the score is ruined, and they are in thousands of dollars in debt that can take years to sort out.

Always watch your credit and make sure all of the transactions and changes are accurate and something initiated by you.

Keeps You Aware

Another big reason watching your credit score is ideal is because it helps keep you aware and in-tuned to your spending habits, repayment habits, credit lines, and so much more.

Being aware of what is going on with your credit score will help you keep your credit in check and your payments handed in on time.

Knowing Where You Stand

Knowing what your credit score is at all times will help you predetermine where you stand when it comes time to apply for a loan, credit card, apartment, etc. You won’t have to waste a hard inquiry if you know what your credit score is before you apply. 

Credit Score and Loans FAQ’s

People tend to have many questions regarding credit use when taking out loans. Here are a few of the most asked questions with the best information we could find to give you helpful and useful answers.

Can Having Multiple Loans Affect Your Credit Score?

This will depend on the types of loans you take out. However, the biggest impact on your score with multiple loans will base on how you handle the accounts and whether or not you are paying them on time.

Does Paying Off A Loan Early Improve Your Credit Score?

Having a loan and making on-time monthly payments is a great way to create proof of reliability. However, paying your loan off early will help you save money on interest and will also free up credit on your report improving your overall score.

Summing Things Up

Taking out a personal loan overall can be a great way to improve your credit score, and it can prove you are trustworthy, decrease interest rates, and qualify you for bigger, better offers in the future. 

Be sure to take out only what you can afford to pay back and be responsible for your spending.

About this blog

Browse through the Blog to read articles and tips on managing debt, improving your credit and saving more money!