Why Do Lenders Look At Credit Scores: Do Loans Have an Impact?

To understand the impact of loans on your credit score and credit report, we must first take a step back to understand the foundation of loans and credit. When someone borrows a loan from a lender, they agree to make a certain number of payments for a certain amount by a particular date each month with a possible interest rate. A credit score represents the amount of trust lenders have that someone will be able to repay their debts and financial obligations on time. A good credit, or higher, credit score suggests they are very timely with payments, whereas a bad credit score suggests they are not very trustworthy with repaying what is owed and have more credit risk.

What most people don’t realize is that your loan payments and even the process of borrowing the loan has an impact on your credit score as well as late payments.

A personal loan or loan application can lower your credit score because 10% of your score comes from the number of credit-based applications you make. Every time you apply for credit, an inquiry is placed on your report to show that a lender has looked at and given a credit check, thus several inquiries in a short period of time may suggest desperation. [Make note that this does not apply to mortgage or auto loans due to a grace period.]

Once you’re approved for a home loan, it’s imperative to consistently make your monthly payments on time because history comprises 35% of your credit score. Timely payments will improve your credit score, whereas late payments will severely hurt your score and credit account.

The balance of your home loan also has an impact on credit because you gain score points by paying that amount down. This means that the larger the gap between your original loan amount and your current loan balance, the better your credit score will be. Like with a mortgage payment, timely payments will leave a good credit history, and offer the best credit cards are credit utilization for your loans.

Although outstanding debt may not directly impact your FICO credit score, be aware that mortgage company or mortgage lenders consider income a factor in your ability to repay a loan. A high debt-to-income ratio may increase your credit risk with a mortgage lender, ultimately causing you to be denied on a mortgage loan, home loan, or personal loan.

Understanding how FHA loans Missouri can impact your credit score is the first step to responsible USDA lending habits as well as building your credit with a credit card and consistently paying off your statements. If you still have questions or are curious about the impact of loans on your score or credit mix, don’t hesitate to call a Liberty Lending Consultant, one of the top St. Louis Mortgage companies.