Loans and Credit Scores: How they Work Together
| Posted in Bank Blogs
For better or for worse, loans and credit scores always go hand in hand. Negative connotations are most often associated with this pair, but there are several positives to understand as well. Let’s take a look at this relationship to learn why it always endures.
FOR BETTER
The types of credit and amount of credit you possess can help you have a higher—and better—credit score. Installment loans—such as personal loans, auto loans, or home loans—can help create a good credit mix for people who also have revolving credit, such as credit cards. Installment loans help you build a positive payment history, provided that payments are made on time. That’s why it’s important to review and understand your monthly loan payment requirement, to assure you can afford the payment and make timely payments, before taking out a loan. Installment loans can also help to reduce your credit utilization ratio. This ratio measures how much of your available credit you are using, and a healthy ratio will have a positive effect on your overall credit score. Utilizing installment loans can help you replace revolving debt, as installment loans aren’t factored into your credit utilization ratio.
“The loan process can be a bit overwhelming at times, and customers should never hesitate to ask questions at any point in the process. As lenders, we want to assure that customers fully understand each piece of the process,” explains Premier Community Bank’s Alisa Anderson. “This includes explaining how different loan products can affect a credit score and what fees are involved throughout the loan process. It’s always a good idea for customers to ask any questions they may have throughout the loan process, so they understand exactly what they are committing to.”
FOR WORSE
Too many inquiries from creditors on your credit report can hurt your credit score. When you take out a loan, the lender will run a credit check inquiry to check for any past due or delinquent loans and overall credit history. Too many of these types of inquiries can have a lasting negative effect on your credit score. Additionally, too many loans can also negatively affect your credit score. More loans = more debt. While more loans may help with the short-term issue at hand, it’s best to focus on limiting your debt dependence and/or getting out of debt completely. It’s especially important to minimize revolving credit debt rather than maxing out credit cards when you have loans to pay off as well. Hint: If you’re shopping around for loans to get the best terms, try to group them all together within the same short time frame. This helps to mitigate damages to your credit score, since most credit scoring models view this activity as “rate shopping” and won’t dock your credit score for doing this.
“Fully understanding how different loans can affect your credit score, whether positively or negatively, is an important piece of the loan process,” adds Anderson. “Reach out to your lender at any time, with questions you may have, prior to finalizing your loan application.”
Contact us today to learn more about loan products. Our team of lenders can help you find the right product to fit your needs.
