Does Applying for a Loan Affect my Credit Score?

Are you looking to apply for a loan? Find out how it can affect your credit score, and what you can do to improve that score if it happens to fall.

Taking out a loan has its advantages and disadvantages – and one of the biggest impacts a loan can make it on your credit score.

Your credit rating, or "credit score", is represented by a number, usually between zero and 1200 (depending on the financial institution from which you request the information). The higher your score, the higher your credit rating, and the more likely the lender will be to loan you money. If you have a bad credit rating on the other hand, a lender may be less inclined to lend you money, or flat out refuse.

You can check your credit score online for free through a number of providers including:

• Credit Savvy
• Credit Simple
• Finder

So, how does applying for a loan hurt credit?

What Can Affect My Credit Rating?

We've discussed that potential lenders use your credit rating to determine whether or not you are a good borrower, i.e. the higher your credit score, the better borrower you are likely to be, since high scores are determined by positive activity such as making repayments on time. But how exactly does applying for a loan lower your credit score, when you haven't even been promised money by a lender yet?

It all comes down to risk. The fact that you are looking at a loan at all (especially if you have applied multiple times) is a signal to a lender that you are statistically more likely to declare bankruptcy. If this happens, the lender may lose money. You now have increased risk as a borrower, as opposed to somebody who has never had to borrow money in the first place. Regardless of whether or not the loan is accepted, you may lose a few points from your credit score.

Aside for applying from loans, there are other activities out there that may affect your credit rating. These include:

• Missing a repayment, or making a late repayment
• Reaching your credit card limit, or "maxing out" your credit card
• Closing credit cards with a good history
• Applying for multiple loans or credit cards at the same time
• Not alerting lenders to a change in name, such as in cases of marriage or divorce
• Your employment
• Criminal history

To minimise the impact on your credit score when applying for a loan, the best thing you can do is go into the application process knowing you will be accepted. While the application might take a few points off your score, doing it once, and not trying multiple times, should keep your score healthy.

Taking out a loan is, in many circumstances, preferable to losing some points on your credit rating, especially if you are in dire need. Just be sure to weigh up the pros and cons before loaning money.

While a loan can impact your credit score, it can be a necessity from time to time, especially if an emergency comes up. Talk to a lender and ask them to be up-front with their fees and repayment requirements. We are always happy to help at Sunshine Loans.