It’s crucial to understand how loans affect your credit score since your credit score, is like your financial “report card.” Lenders will evaluate your credit score, ranging from 300 to 850, to assess your creditworthiness before granting you a loan.
The effect of your Credit Utilization Ratio
Credit Utilization Ratio is simply the ratio of the money you collect on average on a loan, compared to the total amount (credit limit) you can actually take, as determined by Credit Bureaus
It’s generally advised to take only up to 30% of your total credit limit. Lenders are more sceptical about borrowing money to someone who almost always takes up all of what they’re allowed to borrow. So you want to make sure you’re borrowing a good amount and managing your debt for the benefit of your credit score – because having a bad credit score can negatively affect your loan applications
Your repayment history & it’s impact on your credit score
The number one way in which loans can impact your credit score is how well you pay back your loan. Paying back your loans “well” means paying it back in full, and on time; the day it’s due is best in this case. The more you do this, the more you build a positive payment history, and the more lenders trust you with money.
In conclusion, loans can significantly impact your credit score, either positively or negatively. Taking on debt you can afford and making payments on time can help you build a positive payment history and improve your credit score. Keep in mind that planning when to apply for credit, avoiding taking on more debt while paying off existing loans, and managing your credit utilization ratio are all essential factors that can affect your credit score.
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