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There are many reasons people take out loans. You may want to buy a home, a car or need to borrow money to attend college. Whatever the reason, different types of loans affect your credit score in various ways. Regardless of the type of loan you are applying for, submitting too many applications within a short period of time can have a negative effect on your credit score.
A Necessary Repair
A necessary repair never seems to occur at an opportune time. If you have a budget in place and a separate emergency account, you can cover it without the need for borrowing. However, today many people are still living from one paycheck to the next, leaving little room for an unexpected expense. Luckily, there are several types of loans available to cover it. A personal loan through a traditional bank is relatively easy to acquire if your credit is in good standing. If it’s not, then an alternative would be to take out a HELOC. Even if your credit is fair, most times banks will give you an approval due to the fact that your home is used as collateral. These loans can help you improve your credit score, providing you are within the debt-to-income ratio. If your credit is bad you can still get a loan from an online lender such as MaxLend. Generally, short-term loans are much easier to get an approval since the criteria are less stringent. In most cases, so long as you are gainfully employed, have an active checking account and are a natural citizen you will get an approval. Short term loans, such as those offered by companies such as Swift Money Payday Loans, will not affect your credit score unless you default on the payments.
A Home Mortgage
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Buying a home is one of the most expensive and gratifying purchases most people will make in their lifetime. It’s also a form of good credit that can help to raise your credit score provided you make your monthly payments on time. If you default on the loan, it will have a negative effect, drastically reducing your credit score and making it difficult to purchase items on credit.
A car loan is something most people have. Similar to a mortgage, it can improve your credit rating so long as you make your scheduled payments by the due date. For this reason, it’s important to borrow only what you can afford to pay back. Borrowing any more than that can cost you to lose your car and have a severely negative impact on your credit score. Therefore, you may need to resort to getting bad credit loans in the future to compensate for any late repayments.
Credit cards are the most common open-ended loans available. Most people have several. So long as you keep the balances below a third of the credit line, make your payments on time and your debt-to-income ratio is in the accepted range, they can help you improve your credit. However, if you max out your credit cards or make late payments they will have a negative effect quickly.
Most people do not have the money to pay for their college tuition in full. Student loans available through traditional banks won’t affect your credit score until you finish school. After you graduate within 6 months you’ll receive a bill with scheduled payments due each month for a period of up to 10 years. Like any other loan, they will show up on your credit report as a debt. But, so long as you make the monthly payments on time and do not have a lot of other debt, like credit cards with high balances, they will not impact your score in a negative way.
Most people will need to borrow money from time to time to purchase things they need. A problem only presents itself when you take on too much debt at once. A credit score is based on several factors including your income, debt-to-income-ratio and your payment history. It’s always in your best interest to borrow only when it’s absolutely necessary. If you establish a budget early on and stick to it, you can enjoy a comfortable lifestyle and a good credit score that opens the door to low interest and availability.