When you think of loans it might scare you a little especially if you don’t know how to manage your loans. On the other hand, credit is a complex element, and based on your credit status you may think whether the loans will help or harm your credit score.

Certainly, both old and new loans affect your credit scores in different ways

  • The loans can help you strengthen your credit provided you make your payments on time.
  • In case you make late payments on loans then it can affect your credit.
  • They lower the chances to borrow which of course won’t harm your credit score directly.
  • They initially cause some damage to the credit but you can easily overcome the damage upon making timely payments.


Strengthening your credit

The credit means the records of a borrower. In case you borrowed any loans in the past and paid it on time then the lenders will lend you further loans thinking that you will follow the same pattern for future loans too.

When you decide to take a new loan it certainly provides you with an opportunity to make the payments successfully and strengthen your credit score. Even if you had a bad credit history in the past or couldn’t build credit, here is another chance to improve your credit with every month by paying on time.

Taking various types of loans also improves your credit. If there is a mix of different loans on credit cards it would be better to improve your credit. For example, a home and a vehicle loan, etc.

Again, make sure that you do not borrow just to increase your credit score. Try to borrow smartly only if you need it and pick the right loan for a specific need.

Missing loan payments affect scores

If you are not making payments against your loans that are either you are paying late or simply stop paying them, then the credit scores will fall quickly and you will face problems getting further loans.

Borrowing potential

New loans not just affect your credit scores but they also decrease your borrowing potential. Your credit history shows the details of the loan you are availing at present including the monthly payments that you need to pay against the loans. When you seek a new loan from the lenders, the lender would check your monthly responsibilities and then decide whether or not the loan can be given as to whether you can afford to pay for a new loan along with the existing responsibility of other loans payment.

In order to find out whether you are eligible for the loan or not, the lenders evaluate the debt and income ratio which helps them find out the portion of the monthly income you get is consumed by the monthly payments you owe. The less the amount is the better.

It means you don’t have to actually borrow to find out that your borrowing potential is affected.


A little drop in credit scores

New loans basically lead to a little drop in credit scores. In case you have good credit history then this drop is meaningless and might be short term. On the other hand, if you possess a weak credit score or you are trying to create a credit score as a beginner, the drop can lead to problems. So, do not collect debts prior to applying for a new loan which is an important one for you like a home loan.

Your credit history is checked by the lenders each time you seek a new loan. In this process, an inquiry is set up which shows that someone dragged your credit. Inquiries basically indicate that you are in a financial crisis, need a loan and this makes them drag your credit score down a little. If the inquiries are just one or two it is absolutely fine, but a number of them can seriously affect your credit scores.

If you are visiting lenders it is indeed a smart move and the best option to get a fair deal. You can finish your shopping within a limited period of time like if you are willing to buy a house and started comparing different mortgage lenders then make sure you finish your application process within 30 days. In case of auto loans finish the process in at least 2 weeks’ time.

The above-mentioned information would certainly help you find out how loans can affect your credit score, so make sure you make timely payments against loans. Any help for financial problems contact gtacredit.com or call 416 650 1100