What Effect Does A Loan Have On Your Credit Score

By Mav OT •  Updated: 02/28/24 •  5 min read

Have you ever thought about how complicated it is that your credit score affects the loans you can get? This subject often leads to misunderstanding and the spread of false information. Let us find out more. 

Your credit score is like a record of your finances; it is a number that shows how creditworthy you are. Lenders look at this crucial factor when deciding if you can responsibly handle your debt. What happens to your credit score when you get a loan?

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Many things can change how a loan affects your credit score. Lenders usually do a full check of your credit report when you apply for a loan. This request may lower your credit score for a short time because it gives a quick look at your current financial situation. But the effect is usually small and short-lived.

We will talk more about how loans affect credit scores as we go along. 

What effect does a loan have on your credit score?

Loans are important ways to get money that can help you pay for things like buying a house or car, starting a business, or paying for unexpected medical bills. In other words, how do loans change your credit score?

Your credit score is a very important factor in figuring out if you can get loans and other credit goods. The types of loans and credit cards you can get and the interest rates you will be charged depend on your credit score. You might not be able to get a job, rent an apartment, or pay less for insurance if your credit score is low.

It is very important to have a good credit score. There are credit repair pros ready to help you right away if your credit is not good or if you do not have enough. 

Getting a loan can have different effects on your credit score, depending on how you handle it. It could be good or bad. Here is a complete list of these effects:

Does my credit score go down when I get a loan?

Truthfully, it is not the loan that causes a dip in your credit score but rather something that most people find frustrating. 

When you apply for a loan, your lenders do a quick background check on your credit history. This is to determine your financial discipline and the possibility of repaying the loan. 

It is normally considered an inquiry, which could be soft or hard. 

When a hard inquiry is done on your credit before a loan approval, it does not go well, your credit loses some point. 

However, getting a loan does not let your credit score go down. 

How long does a personal loan stay on your credit report?

A personal loan is one of the easiest loans to help you build your credit score. When you apply for a personal loan and receive the approval with all the terms, the loan gets to be part of your credit history and credit report. 

It can take a year to a decade for a personal loan to stay on your credit report. Even if you finish paying your personal loans, it may take a decade or more to leave your credit report.

Why is my credit score going down if I pay everything on time?

Even if you make timely payments, your credit score could go down for several reasons. One thing to think about is your credit utilization, which is the ratio of your credit card balances to credit lines. If your accounts go up, even if you make payments on time, it can hurt your credit score. Also, applying for new loans or credit often can cause hard questions, which can temporarily lower your score.

Lastly, if the credit bureaus change the scoring model or formulas they use, it could affect your score. To help with these issues, you should keep an eye on your credit report, pay off your credit card bills quickly, avoid opening too many new accounts, and dispute any mistakes you find.

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