Do personal Loans Affect Credit Score? If you do not have an emergency fund an unsecured personal loan might be the best way to handle unexpected expenses. This is the major reason why people decide to take personal loans from predators. If you are about to take a personal loan you might have one question in mind, which is the question of do personal loans affect credit scores.
Do Personal Loans Affect Credit Scores?
So many people looking to take a personal loan have asked this question and today we are going to give you the right answer. We are first of all going to take a look at what a personal loan is the advantages of a personal loan and how it can affect your credit score. So that by the end of this article you can make up your mind if you will go through with taking a personal loan or not.
What is a Personal Loan?
A personal loan is simply an unsecured loan which means that a vendor does not require collateral or a cosigner for you to get this loan. However, the creditor takes a look at your credit score to know if you are likely to pay back a personal loan or not before giving it to me. A personal loan is one of the most common types of loans that people take to get themselves out of tight situations.
A personal loan does dictate what you are going to be using the loan money for because you can use the money from a personal loan for any purpose you want, unlike mortgages. A personal loan is what many people decide to go for instead of going for mortgages or another type of love. Because they are at liberty to decide what they want to use the loan money for.
Reasons why People get Personal Loans
There are so many reasons a person can decide to go for a personal loan. Because they are at liberty to use the loan money for anything they like that being said some of the reasons people go for personal loans and listed below:
- They can be used as emergency home or auto repair
- Personal loans can be used where there is a medical emergency.
- Can also be used to start a business
- People that are already in debt can use personal loans as a refinancing option.
- Can be used to cover the cost of tuition and other.
These and more are the reasons why many people decide to go for a personal loan instead of getting a mortgage or an auto loan.
What is a Credit Score?
This article is about how a personal loan can affect your credit score so it will not be appropriate if you do not refresh your memory on what a credit score is. Also for those that do not know what a credit score is it is a value attributed to a borrower based on their credit history. It is a numerical value that is between 300 to 900 which determines the creditworthiness of an individual.
The higher the credit score the better your chances of getting a personal loan and vice versa. A credit score is determined by the three credit bureaus in the United States of America. These credit bureaus are Transunion Experian and Equifax. They are directly responsible for calculating a person’s credit score according to the person’s credit history.
What are the Factors that Impact your Credit Score?
Now that we have known what a personal loan and a credit score are Leicester termine some of the factors that impact your credit score. To determine your credit score the credit bureaus take into consideration the below factors. These factors are directly responsible for the type of credit score that you have.
- Payment history – payment history accounts for 35% of your credit score.
- Outstanding debt – this is the total amount of debt that you oweing it accounts for 30% of your credit score.
- Length of credit history – the length of Candice which tree is the amount of time you have been using credit and it accounts for 15% of your credit score.
- New credits – this account for 10% of your credit score.
- Credit mix – credit mix is the number of credit lines that you have open which includes secured credit cards and it accounts for 10% of your credit score.
These are the factors that are used in determining your credit score which means that they are the factors that directly affect the score of your credit.
How do Personal Loans Affect Credit Score?
Personal loans can either help or hurt your credit score that is the short answer to the question that brought us to this article. When they are used properly and responsibly they will help to improve your credit score ever been handled poorly or badly hurt your credit score. So let’s take a look at how personal loans affect and help your credit score below.
How do Personal Loans Help your Credit Score?
Personal loans help your credit score using three ways. One of the ways that personal loans can use in helping your credit score is through Diversity. Different types of credit is counted into your credit score so adding a personal loan to the mix gives your credit score a boost. Another way a personal loan can help you is it helps you establish a pattern of taking loads and making payments which is what creditors want to see.
Finally, it helps to keep your credit utilization ratio low instead of you maxing out your credit credit card for an emergency you can simply use a personal loan. Therefore your credit utilization ratio would not be affected helping you to keep your credit score.
How does Personal loan Hurt your Credit?
Just as there are three ways a personal loan can help your credit it can also what your credit in three ways. The first way a personal loan hurt your credit is when a hard inquiry is made on your credit report when you apply for the loan. Lenders usually contact the credit bureau for your credit history so that they can determine your creditworthiness. When that is done it causes a hard inquiry in your credit history.
Another will a personal loan can hurt your credit score is as a result of various fees associated with low that you need to constantly make. Finally the biggest wave a personal loan can affect your credit score is as a result of the payment. Missing out on a loan payment is definitely going to cost you interest and also going to affect your credit score negatively.
FAQs
How many points does a loan affect credit score?
When getting a personal loan as I have mentioned a hard credit inquiry is made which usually reduces your credit score by up to 10 points. Although this damage is not that significant it will show that an enquiry has been made and your credit score will reduce.
Do loans improve your credit?
Just as I mention in this article loans can help you improve your credit based on the theory practice listed in this article. All you need to do to simply scroll up and take a look at it or read through this article to get the full picture.
