June 4, 2020
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:
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:
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.
Now that you've asked the question, "does applying for a loan affect credit score?", your follow-up question is likely, "how can I improve my credit rating?". There are a few ways to improve your credit score, and they're quite simple:
Sometimes, despite your best intentions, you need a little help money throughout life. There are lenders out there that will allow you to borrow, particularly if you only need a small loan of under $5000. They can, however, come with high monthly fees, plus high late payment and default fees.
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.