A loan is money that one person (the lender) gives to another person (the borrower) with the promise that a repayment will be made. When you take out a loan, you usually sign a contract, a certain number of payments for a certain amount of money, to pay the agreement every month from a certain date.

In the broadest sense, the loan is the trust or belief that you will repay the money you are borrowing. You said you have good credit, if lenders believe you will repay your debt (and other financial obligations) on time. However, bad credit means that you are not likely to pay your bills to the creditor on time. Your credit is based on how you treated your past debt obligations. If you’ve historically paid on time, lenders have more confidence that you won’t pay new debts on time.

Your payments on a loan (and even the loan company itself) has an impact on your credit particularly your credit score, which at some point is a numerical snapshot of your credit history.

 

Credit applications affect your credit

Credit applications affect your credit

Do you know that applying for a loan can lower your credit score even if it is only a few points? This is because 10% of your credit score comes from the number of credit-based applications that you make.

Every time you apply for credit, a request is placed on your credit report showing that a company has checked your credit report. Multiple inquiries, especially in a short period of time, may indicate that you are in desperate need of a loan or that you are under more debt than you can handle, neither of which is good.

If you are looking for a mortgage loan or auto loan shopping around, you have a time limit during which multiple loan requests do not affect your credit score. Even after you finish your rate shopping, loan requests are treated as a single application and not more applications. The time window between 14 and 45 days during which each credit score the lender uses to review your score. Therefore, you should try to keep shopping for your loan in a small amount of time to reduce the impact on your credit score.

 

Timely Loan Payments Raise Credit Scores

Timely Loan Payments Raise Credit Scores

Once you are approved for a loan, it is important that you make your monthly payments on time. Your loan payments will have a significant impact on your loan. Since payment is 35% of your credit score, making payments on time is essential for building a good credit score. Even a single missed payment can hurt your credit score. Timely loan payments give you a good credit score – and you make an attractive borrower – while late loan payments will damage your credit score. A loan payment shortage can be followed by a more serious flaw such as repossession of the car and foreclosure on your home resulting in a series of late payments.

 

High credit balances from Credit Harm

High credit balances from Credit Harm

The remaining amount of the loan also affects your credit. You will gain credit score points as you pay your scales down. The bigger the gap between your original loan amount and your current loan balance, the better your credit score will be.

 

Your loan and your debt-to-income ratio

Your loan and your debt-to-income ratio

Your loan amount makes up your debt-to-income ratio, which is a measure of the amount of your income that is spent on debt repayment. While your debt-to-income ratio is not included in your credit score, many lenders consider income a factor in your ability to repay a loan. Some lenders have developed their own so their proprietary credit scores that use their debt-to-income ratio as a credit consideration. Having a high loan amount cannot harm your credit, but it could increase your debt-to-income ratio and lead to denied loan applications.