Your ability to borrow money is greatly dependent on your credit score. Similarly your credit score is greatly dependent upon the money that you borrow. Since these two are so closely connected to each other it needs to be understood how borrowing a loan can impact your credit score. Your credit rating is basically a measure of your risk worthiness. Risk worthiness means how much trust can be put in you by a lender to repay the money that you borrow. A good credit rating means that you will most likely repay the money that you borrow while a bad credit rating means otherwise. It with a good credit rating can get a loan more easy and on more favorable terms.
Impact of Loan Application on Your Credit Rating
A credit score considers different factors in its calculation. One of these factors is the influence of credit Inquiries into your credit report. And Inquiries occurs when the consumer makes an application for credit to a lender and the lender makes a request to the credit bureau to view the credit report. Whenever a lender asks you view the credit report of a consumer owing to the credit application made by the consumer is called an enquiry. If you make multiple applications for credit in a short amount of time resulting in multiple enquiries into your credit report, it will have a negative effect on your credit score. This is because several enquiries in a short period of time that may indicate that you’re facing financial difficulties and are in dire need of money which you are trying to fulfill by taking money on credit. Taking money on credit to substantiate income is a risky process which makes the consumer a higher risk individual and therefore not a good choice for giving a loan. This
Effect of Payment History on Credit Rating
Having some kind of a loan and making timely payments on the loan is the only way to build credit history. If you have no credit transaction then you will have no record in the credit report and subsequently will not be able to manage a good credit rating. Taking out a loan and making regular and timely payments on it is a good way to build a good credit rating. If you follow the practice of paying your loan in time every month the effect on your credit rating will be positive.
High Balances and Debt to Income Ratio
Having a high balance on your loan, particularly on a credit card can be detrimental to your credit rating. However as you continue to pay your balance and the balance goes down your credit rating will improve.
Debt is to income ratio is something that is not considered in the credit score calculation but several lenders look at this aspect before approving you for the credit. Before applying for major loans such as a mortgage loan your debt to income ratio should be ideally not more than 30 to 40%.