Will taking out a loan give me a bad credit score?

Will taking out a loan give me a bad credit score?

Simply taking out a loan, whether it’s with your bank or a short-term loan company, will not necessarily give you a bad credit score.

The way you go about applying for a loan and the timeliness of your repayments can influence your credit score, although simply taking out a loan is unlikely to negatively affect your credit rating. Keep in mind, some lenders look at values such as the total amount of credit available to an individual when determining their credit worthiness.

Your credit score is determined by a number of factors, including how well you repay creditors, whether it be a credit card or personal loan.

Loan applications and your credit score

Each time you apply for a loan, the lender may do a credit check to assess your financial situation, and this credit check leaves a mark on your credit file that can be seen by other lenders. Hard inquiries can slightly lower your credit score and can stay on your report for a number of years. A soft inquiry is when a company checks your credit report as a background check.

If you have several searches logged in a short space of time, it can appear that you are struggling for money. That could suggest you haven’t managed your money well and may make you less appealing to lenders.

To reduce your number of applications, you may want to ask questions such as:

  • Do you need to be realistic about the type of loans you could be accepted for? If you have had credit problems in the past, you may struggle to get a loan from a high street bank, but there are loan companies that specialize in lending to those with poor credit ratings.
  • Do you know your credit score? Using a credit reference agency such as Experian or Equifax, you may be able to get a free or low-cost report which can highlight areas for improvement on your credit file.

Loan repayments and your credit score

Although taking out a loan may not damage your credit score, not keeping up credit repayments could.

The most important thing is to ensure you repay your loan in a timely fashion, and always contact your lender if you feel you will be unable to pay. If you do not make repayments on the due date and to the full amount agreed, this will be reported to CRAs and impact your credit file. Missing repayments could make it harder to take out further credit in the future. This is because lenders may feel you are unreliable when it comes to paying back repayments, therefore making you a high risk.

Can borrowing improve your credit rating?

Yes, it could. Your credit score could get better if you repay your credit in full and on time. That means repaying everything you borrow plus the interest, and not missing a payment.

The more evidence there is on your credit report of you making your repayments, the more likely lenders are to trust you and lend to you.

 Staying committed to your repayment plan and paying the loan off in full within the agreed time frame can have a positive impact on your credit file, as it demonstrates to other lenders that you can be trusted.

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