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Tuesday, February 15, 2011

How loans affect your credit score

Loans affect your credit score plain and simple. How loans affect your credit score is another matter entirely as this article will illustrate. Credit scores are derived from credit reports that elaborate your credit profile.

A credit score is the result of a quantitative analysis of one's credit variables, some or all of which are within a credit report. These scores are computed by companies such as Fair Isaac and TransUntion; they are called FICO and Vantage scores. Consequently, understanding how a FICO score is computed can help you understand how loans affect your credit.

Types of loans and their influence on credit

There are so many types of loans that it would be unreasonable to apply the same credit influence to each kind. This is because different loans have different interest rates, risk, terms of service, guarantees, fees etc. Since these differences affect credibility in varying ways determining how these loans affect your credit requires a specific look at the different loans available, a few of which are listed as follows:

• Credit cards
• Vehicle Loans
• Mortgage loans
• Business loans
Student loans
• Equity loans
• Secured loans

To determine how these loans specifically influence credit, a closer look at the credit score reveals their influence. As noted above, loans' affect on credit depends on a number of factors and are illustrated in the Understanding Your FICO score' document available through www.myfico.com. Some of these factors used by FICO are listed below with approximate weighted percentages of affect on credit score. The term credit' refers to money lent via various loan type(s) to the borrower who's credit score is in question.

• Credit/payment history (35% of credit score)
• Length of credit history (15% of credit score)
• Types of credit in use (10% of credit score)
• Amounts owed (30% of credit score)
• New credit (10% of credit score)

In the case of credit card loans, the amount of available credit used negatively affects credit score if it rises above 40%. Additionally, the total amount of debt from a loan and/or group of loans determines how indebted a borrower is i.e. amount owed. If loan payments have been missed, those missed payments will have a greater impact on credit score if they are closer in time to the present. Taking on a lot of debt or applying for several new loans at once can also negatively affect credit score because it statistically adds to a negative debt profile when this happens.

Since amount of debt owed only affects near 30% of total credit score, having a lot of debt does not automatically rule out having a good credit score. Rather, if this is the case, it does imply other factors such as paying bills on time and not applying for new loans become more important in keeping your credit score good. Further points to consider include having different types of loans and paying them off, and banking with the same institutions can improve the credit mix score and credit history aspect of the credit score. Too many credit cards can also impact your credit score negatively even if the credit isn't used. Some tips to keep your credit score up when borrowing through loans are listed below.

• Have 3 or less credit cards
• Use less than 40% of available credit
• Pay off a variety of different loans over time
• Bank at the same institution for a long time
• Avoid late payments
• Refrain from multiple new loans

Loans affect credit score in the way they are paid off, the amount of the loans and the frequency and type of loans applied for and borrowed. Since credit history constitutes a considerable part of credit scoring, how one has borrowed in the past can also be influential even if the loans don't exist or have been paid off.

This article has illustrated how debt in the form of loans influences personal credit score and offers tips and information on how to potentially improve credit score from loans. Loans can be used to help build credit scores but only in certain circumstances and as defined by the credit score reporting agency involved.

Source: http://www.myfico.com


  1. Nowadays even with a low credit score people have chances to get money loans provided on the web, and without any doubt it's a plus. Such loans, by the way can also benefit to your credit report if covered in full and on time. But still one should be extremely careful with his credit history and check the report regularly.

  2. Loans affect your credit score only when you not pay your repayments on time but today's world their are lots of lenders available in the market who approve your loan request with no guarantor loans despite of bad credit history.