When you take out a loan, it will show up on your credit report. Every month your lender will report how you manage the debt to the credit bureaus.
As a result, new loans will impact your credit score.
Handled responsibly, loans can raise your credit score but a mishandled loan can bring it down fast.
1. On-time loan payments.
One of the best ways to build your credit score is by making your loan payments on time. Every time you make a scheduled payment, your credit score goes up by a little bit.
In addition, it shows creditors you can handle your financial obligations because they see no missed payments on your credit report.
With loans, you don’t get any benefit from paying off the balance faster. It’s not like with your credit cards where the faster you can pay down your debt, the better.
The credit agencies are just concerned with whether you can make your minimum scheduled loan payments on time.
2. Multiple types of loans.
Loans can also help your score by adding new types of credit to your account.
Credit bureaus base a small part of your score on how many types of debts you have. It’s better to have a car loan, a home loan and a credit card than to just have a credit card.
If your loan is a new type of debt for your account, it should raise your credit score.
3. Overall debt.
When you take out a new loan, it will increase your total overall debt. While this shouldn’t hurt your credit score, it is something creditors will consider when they see your credit report.
If you have a high amount of debt, they may be reluctant to lend you more money in the future.
4. Missing payments.
A new loan will help your credit score unless you start missing payments. In that case, your score is going to take a big hit.
If you miss just one loan payment, it could lower your credit score by up to 100 points.
In addition, your lender could charge you an extra penalty fee for each missed payment. If you’re going to take out a new loan, be sure you can handle the payments.
The bottom line is the way a loan will affect your credit score depends on how you handle the loan. As long as you manage it well and make all your payments on time, the loan should raise your credit score.
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