When it comes to your financial record and your credit score it is clear that everything you do in relation to your finances, from applying for a loan to being late with a payment, for instance, can all have a positive or negative impact on your number.
If you are seeking out access to some faster cash than you might get with a bank it might be that you decide to seek out a better installment loan to give you what you need, but how does that move impact on your credit score?
It’s a question that many consumers seem to want to know the answer to, so if you want to know a bit more about how installment loans can affect your credit score in the short and long term, here are some of the key points to consider.
A chance to build your credit score
If you have a bit of a problematic credit history and there are a few missed payments and defaults that have happened for whatever reason, you will want the chance to set the record straight and show that you can handle your money responsibly.
That’s the beauty of credit scores to a certain extent, as they paint a picture of your past performance and current financial commitments, but whatever your current score is, and it’s a reflection of where you are right now with your finances, there is always an opportunity to rebuild your reputation or just improve your score in the future.
It is not an exact science when trying to interpret how your credit score is created and different credit agencies use their own methods for calculating the score, however, there are some fundamental factors that all come into play regardless of who is calculating your creditworthiness.
Your payment history and how much you currently owe will be significant factors, and other aspects that count are how long your credit history is and how many applications for credit you have been making recently.
Taking out a small installment loan is a potential opportunity to build and improve your credit score.
How a loan can help
There are several positive points to consider when it comes to installment loans and your credit score.
It should be easier to get approved for one of these loans as their lending criteria tend to reflect the fact that borrowers might be experiencing a few financial problems or don’t have the best score, which could see them rejected by their bank.
It is a good idea to keep a close eye on your credit score and check what your current rating is before making any application.
Once you have done this, it is often a sound strategy to try and check whether you will get the money if a pre-approval check is offered.
Start by asking for a small sum of money as the lender will be more likely to accept this type of request after you have verified what their minimum credit score requirement is.
Once you have been approved and start paying back the loan this will be your chance to improve your payment history, as the lender will be reporting your payment behavior to the main credit rating agencies.
When applying could have a negative effect on your score
It is wise to understand that applying for installment loans can impair your credit score in the short-term, under certain circumstances.
A short-term dip in your score because you have applied for a loan is not a major cause for concern, especially when you weigh that factor against the potential long-term improvement to your score you could achieve.
If you are using a lender that does not do a credit check, they are going to be basing their decision on your income alone, which means that this type of application won’t feature a “hard inquiry”, which is a reportable transaction on your credit file.
The application process is not the main cause for concern with regard to the impact it can have on your credit score, its what happens afterward that matters more.
If you borrow the money to fund further spending this will increase your level of debt exposure and this could have a detrimental impact on your credit score because you are increasing your indebtedness.
Failure to repay the loan you have taken out or missing payments is something that could damage your score for as long as seven years, so it is sensible to only take out a loan that you can afford to repay.
If you are in a position to pay back the money you borrowed earlier than scheduled it is generally a good idea to do so and will have a positive impact on your credit score, although not immediately.
The reason for the temporary setback when you repay early is because it can take a short while for credit agencies to catch up, mainly because of inactivity with your payment history and a lack of recent installment loan information.
That is a minor irritation in comparison to the benefits associated with early repayment.
Paying off any loan has to be regarded as a positive action and some of the obvious positives include being able to save a bit of interest that would have been charged and the big plus of having a paid loan account on your file.
The record of your loan does not disappear from your file for a while so your good payment behavior should have a positive influence on your overall credit score.
It should be remembered that your credit history and score is constantly evolving and changing, for better or worse, which means that there is always time and opportunities to put things right if that’s what you need to do.
If your credit score is not where you want it to be right now an installment loan might offer you a chance to get on the road to recovery and a better financial outlook.