Loans affect credit score in a myriad of positive and negative ways, beginning with the first time an application for a loan is completed. Each time an individual applies for a loan, a credit inquiry is added to a credit report, which can lower one’s credit score. Of course, loans affect credit score in a positive way as well, if one makes payments on time and pays off the loan.
As mentioned above, each loan application shows up as a credit inquiry on a credit report, which does have a negative impact on credit scores. When rate shopping for loans, such as a for an auto loan or a mortgage, it is a good idea to do all the rate shopping within a two-week period. This is because the credit reporting agencies account for rate shopping in this way, and will consider all inquiries within the two week period as a single inquiry, rather than a number of different ones.
Loans affect credit score in another way, too. Each loan that an individual takes out is considered an obligation on a credit report. A high number of loans will make an individual seem like a risk to a lender, and will make it less likely that a lender will approve another loan. A high number of loans will not necessarily negatively impact a credit score, as long as the payments are current, but they do make a borrower seem like more of a risk.
Loans affect credit score in a positive way as well. If a borrower takes out a loan, or a few loans, then regularly makes the scheduled payment on a loan without ever missing a payment or being late, this will steadily improve one’s credit score. Once the loan is paid off, it will remain on the credit report with a statement that says the borrower paid the debt as agreed. It is not necessary to make more than the minimum payment on a loan, but this can simply help to pay off a debt sooner.
It is best to have a varied amount of loans on a credit report. A combination of revolving debt, such as regular credit cards and store credit cards, as well as loans with a standard monthly payment, illustrate one’s ability to manage different types of debt successfully. Loans affect credit score to a significant degree, even though they make up only one portion of one’s credit score.