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Will Applying For A Loan Affect My Credit Score?

Apr 9, 2021 | Credit Score, Financial Services, Financial Wellness, Good To Know

Emergencies don’t usually happen when it’s financially convenient, and that can mean scrambling to find the extra cash to cover a sudden  medical emergency or home repair or any number of things. Depending on the amount of the emergency, you may be able to cover it with your credit card — or cards — but unless you can pay it off in full on the next billing cycle, you’ll be facing some hefty interest charges. 

A personal loan is probably the best way to go, but you should be aware how this can negatively affect your credit score. The lender will make a credit inquiry, which is added to your credit report. Even the loan itself can hurt your rating, since it adds to your debt-to-income ratio. However, making regular payments until the loan is retired can actually help boost your credit score in the long-run. 

There are three major credit reporting bureaus that monitor your score –  Experian, Equifax, and TransUnion — and your potential lender will look into your credit history when you apply for a loan. These three  bureaus will mark the credit check as an inquiry, which will lower your score. Normally, this will only be by a few points, but if you already have a bad credit history, short credit history, or only a few accounts, the hit your rating takes could be greater. 

Taking out the loan will increase your debt-to-income ratio, which will lower your score and make it unlikely you’ll be getting new credit anytime soon. However, your history of repayment of the loan will have a greater effect on your score. If you continue to make  your payments on time, and as outlined in your lender’s agreement, you can not only recover those lost points, you can actually gain points. 

You should also be aware a personal loan is regarded as different from an auto, school, or home loan, since many people apply for those, and often from multiple sources so they can comparison shop. Because of this, your credit monitoring bureaus view this as one inquiry, since it’s all likely to occur within 30 days of one another. 

But that’s not how it works with personal loans. Each look at your  credit history will be a separate inquiry, so if you’re shopping for the best interest rates and loan terms, you’ll want to do your homework before you apply. 

Written by Stan Timmons

Stan is a journalist, novelist, illustrator, magazine writer and comic book creator. With a lifetime of being a freelance creator, he’s learned a thing or two about saving money, building credit and living smart.

The information provided is for informational purposes only and is not a substitute for professional financial advice. You should consult a credit counseling professional concerning the information provided and what should work best in your financial situation. And any action on your part in response to the information provided is at your discretion.

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