How Do Personal Loans Affect Credit Score

Many people are curious about how taking out a personal loan can affect their credit score. The credit score is an important factor that is taken into account when you apply for a loan. A low credit score can help you to obtain a better interest rate and save money on the loan. Taking out personal loans can affect your credit score in good and bad ways.

You can boost your credit score by having different types of credit in your credit report. If you already have a lot of revolving credit, you will be able to boost your credit score by taking out a personal loan. Another way personal loans can improve your credit score is by reducing the credit utilization ratio. For example, you can use a personal loan to consolidate your credit card debts. This will reduce the balance in your credit card and subsequently lower the credit utilization ratio.

Once you’re approved for the loan, you must be committed to make on time payment. If you are punctual in making payment, you will see your credit score slowly increasing in 6 months or more. Whenever you miss a payment, it will be reported to the credit bureau and they will reduce your credit score. If you have been missing payment for a long time, your account can go into default and handed over to the debt collector. A bankruptcy record can stay on your credit report for up to 7 years and make it hard for you to obtain a loan from the creditors.

Whenever you take out a personal loan, it will create an inquiry on your credit report which will result in a slight dip of your credit score. To avoid this, you should refrain from applying multiple personal loans at one time. Instead, you should apply for one loan and then wait for the approval. If it is not approved, you can apply for another loan. Alternatively, you can fill in forms for getting preapproved for different loans before going ahead to actually submit the application for the loan you are interested.

Getting approved for a personal loan does not solve your financial problem. If you continue charging your credit cards, you will still end up maxing out your credit card and end up in debt just like before. You should plan your budget in the first place to help yourself get disciplined in your finance. Every now and then, you can review your credit report to ensure there is no mistake on it. It is free to request for a credit report from the credit bureau once every 12 months. If you notice an error in your credit report, you can have it corrected and get your credit score increase again.