Are you in the market for a loan, but wondering, “Does getting a loan hurt your credit?” We’ve got the breakdown you’re looking for in this article!
Does getting a loan hurt your credit?
Simply put, yes — your credit will be affected when you choose to take out a personal loan. Your credit will be affected in both good and bad ways and will affect your score as a whole.
In the future, it may be challenging to take out another loan until the current mortgage has been paid off. We explain more below.
Factors That Contribute to Your Credit Score
To understand how taking out a personal loan can affect your score positively or negatively, you need to know how credit score is calculated.
Your credit score is based on these 5 factors:
- Your payment history
- Total amounts owed
- Credit history length
- New credit items
- Your credit history mix
Each piece is responsible for a different percentage of your credit score.
Your payment history accounts for approximately 35% of the overall rating. Your outstanding debt will be responsible for 30% of the total score. The length of your credit history accounts for about 15%.
Any new debt, as well as the number of credit lines you have, account for 10% each of your overall credit score.
Does Getting a Loan Hurt Your Credit Score?
Getting a loan could affect your credit rating, because not only has your existing debt increased in number, but you have opened a new line of credit and added more debt. The job of the credit agency is to keep track of existing debt and debt added to that.
This is why, if you take out a personal loan and need another one shortly after, you may be denied because you’ve taken on as much debt as you can handle. Your credit history will impact your credit score more than new loans.
Your score can be improved if you are in good standing with your loans. On the reverse side, the score could drop if you have defaulted on previous loans.
As long as you are putting some money towards preexisting loans, your credit score will slowly improve over time.
Loans and Credit Score
Credit scores range from 300 to 850, with 300 being on the lower spectrum.
If your credit score is higher, you may have an easier time obtaining a personal loan. The higher your credit score is, the more trust a loan company places in you and your ability to pay it back.
Here, we have a breakdown of credit scores and what they mean in terms of your ability to get a personal loan:
- <580 — You’re considered a risky borrower and will have a difficult time finding a loan
- 580-669 — Your score is still low, but you will have a slightly easier time obtaining a loan
- 670-739 — You’ve met the average credit rating and now have more options when it comes to loans
- 740-799 — You’re showing loan companies that you can handle taking out more lines of credit
- 800+ — The world is your oyster, and you can choose from several loans and get accepted for these loans
For more about how loans can affect your credit score, check out this CaptainCash.ca article.
Go Get That Loan!
We’ve answered the question, “Does getting a loan hurt your credit?” and possibly eased any of the fears you have about applying for a loan.
The worst that could happen is you get turned down and find another company to apply through.
If you would like to know more about finances and more, visit our website now for more information!