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How Do Loans Affect Your Credit Score?

How Do Loans Affect Your Credit Score?

When it comes to getting your loan approved, your credit score can make or break the deal. Having a good credit score is crucial for a smooth loan sanctioning process, preferential loan terms, and quick disbursal. But did you know that taking a loan also affects your credit score? Yes, it works both ways.

If you are planning on taking a loan, you should ensure that you have a good credit score. Also, you should know how loans can affect your credit score.Why? So that you can apply for a loan at the right time and make the correct decisions during your repayment tenure.

In this article, we will answer the question ‘how do loans affect credit scores?’

Too many loan applications reduce your credit score

If you keep applying for too many loans, lenders will request your credit score from your credit bureau. Thus, there will be several hard inquiries made towards your records. Hard inquiries can greatly reduce your credit score.

To prevent this, avoid applying for too many loans. If your loan applications keep getting rejected, stop applying for a while. Instead, assess the reasons why you might be facing rejection. Check your credit score online, and improve it if necessary.

Availing of a new loan brings it down temporarily

When there is a new loan on your name, this means that your overall debt has increased. This reflects in your credit report and lowers your score.

However, the decrease in credit score is temporary. Your credit score will level up as you start repaying.

Additional Read – Importance of Your Credit Score for Home Loan Post COVID-19

Your repayment behaviour is the key factor

Repaying your loan in a disciplined manner is crucial to the health of your credit score because 35% of your score depends on it.

If you repay your loan in a timely fashion, it demonstrates that you can handle debt responsibly. So, your credit score will improve. But, if you make delayed repayments, it shows that you are an irresponsible borrower, and your credit score will suffer.

Long-term secured loans can help you increase your score

If you use credit cards, taking secured loans such as home loans and auto loans can expand the range of your credit mix. This will help demonstrate that you have experience handling various types of credit.

Additionally, home loans have a long tenure. If you make timely repayments over several years, your credit length increases. The longevity of your credit records also has a positive impact on your credit score.

Additional Read – Do’s and Don’ts to Improve Your Credit Score

To summarise

When lenders reach out to credit bureaus to fetch your credit score, it reflects on your credit report as a hard inquiry, lowering your credit score. And once your loan is approved, your subsequent repayment behaviour greatly affects your credit score. Handling a good mix of credit for a long time also lends you credibility as a borrower and improves your score.

Want to know how your credit health is doing? You can perform a quick credit score check online with Tata Capital’s free tool. Provide your basic details, mobile number, and PAN, and get your detailed credit report and score.

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