One of the questions we hear frequently is “Why is my credit score lower when I apply for a loan?” Credit scores fluctuate for a variety of reasons, and some of those reasons include opening a loan or applying for any type of new credit.
Whenever you apply for any type of credit, the potential lender runs a credit check. When a lender is considering lending money to you and evaluating the risk of doing so, it creates a hard inquiry. This kind of inquiry can stay on your credit report for two years and can trigger your credit scores to drop slightly. This is only a temporary drop, however, and your scores should recover within a month or two. Even so, applying for too much new credit in a short period of time can hurt your credit.
Opening a new loan account increases the total amount of debt that you have, which can also cause your credit score to take a slight dip. Opening more than one new account in a short period of time may also cause a drop in your credit score.
A new loan can hurt your credit score if you miss any payments. Before applying for a new loan, consider if you can afford the monthly payments and whether you can continue to make payments if you should have a decrease in income. Paying the new loan as agreed but missing a payment on other accounts you already have will also hurt your score.
Age of Accounts
Another factor in your credit score is the age of your accounts. Opening a new account lowers the average age of your accounts, which can cause a slight dip in your credit score.
How a New Loan Could Help Your Credit Score
If you took out a new loan to consolidate credit cards so that you only have one payment instead of several, that may help your credit score. If you open a personal loan to consolidate your credit cards but turn around and borrow against your credit cards again, your overall debt goes up, and you may find you’re having difficulty making your payments.
As long as you make your payments on time, a dip in your credit score when you first take out a loan will resolve itself in a short period of time. The more you prove your ability to handle borrowed money responsibly, the better your credit score is likely to become.
Protecting Your Credit
Your borrowing power depends on having a good credit score and credit history. Besides making payments on time, avoid borrowing money if you don’t need it. Check your credit report to make sure all the information on it is accurate. Errors can bring down your credit score.
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