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How Do Loans Affect Credit Score?

15 September 2020

Applying for a short term loan comes with a lot of questions. How much to borrow, repayments and interest rates are just the beginning. An important consideration that you don’t want to overlook is will a loan application damage my credit score?

Will a loan application affect your credit score?

The simple answer is yes. Any unsuccessful application for an instalment loan can have a negative effect on your credit score. This is because responsible lenders always run a complete search of your credit history. This is normal and any unsuccessful application may result in a small negative impact on your credit score.

However, you can always make up for any negatives to your score with some sensible financial behaviour. Regular payments such as paying rent regularly can mitigate the effect of an unsuccessful application. 

It’s worth mentioning that there are several different credit agencies often referred to as CRAs. Experian, Equifax, and TransUnion are responsible for credit checks in the UK and each will have a score to track your credit rating. 

CRAs understand that most people have to borrow money at some point to help pay for things. Whether it’s a mortgage or a short-term loan, any company reviewing your credit rating is not going to be alarmed or mark you down for applying for credit once or twice every few years. 

If you’d like to improve your credit and your chances of a successful loan application then check out our handy 8 tips to improve your credit score. We’ve also put together a little guide below to show you what to avoid if you want to maintain or improve your credit rating. Maintaining good credit is the key to obtaining personal loans. 

If successful will my loan affect my credit score?

Yes, paying off a loan successfully will improve your credit score. Missing payments, failing to pay off your debt, or both, will result in a negative effect on your credit score. 

What else can negatively affect my credit score or loan application?

Companies will often look for red flags that warn them about a particular person’s financial habits. Here are some behaviours to avoid if you want to improve your credit score. Try to avoid these as much as possible.

Frequent new accounts

Changing bank accounts can seem unreliable to lenders and they will often flag applicants who open new bank accounts too often. Try to maintain the bank accounts you currently have and limit opening new accounts to only when necessary. 

Reaching your credit limit

Avoid reaching the limit of your credit. Using your credit responsibly without reaching the limit is prudent. Lenders may also think that if you max out a credit card you are in financial difficulty. 

Applying for credit frequently

As stated above every credit application has a slightly negative impact. Avoid applying too much as the frequent hard searches on your credit record can build up and have a larger negative effect. Lenders may also think you’re in financial difficulties if you are constantly applying for loans. 

Missed payments

The biggest red flag for lenders is missing payments. Missing payments can lead to defaults and end up affecting your credit score for years.  

Borrowing too much

Borrowing more than you can afford to pay back is another red flag. This shows a lack of foresight and borrowing too much can also lead to missed payments and defaults. As if this weren’t enough, if lenders have to take legal action to recover unpaid debt this will also go on your credit score and make it difficult to obtain loans in the future. 

‘Soft’ searches don’t affect your credit score

Even with all this information, it’s important to know your credit rating. That’s why you should know that you can ask for a quote from a lender or your credit report from a credit reference agency without worrying about any negative effects to your credit file. As long as you don’t actually apply you won’t take a hit from a ‘hard’ credit search. 

Other things that don’t affect your credit score include people you live with, previous occupants at your address, financial issues that occurred several years in the past, health expenses, income, savings, or type of employment. Lenders may ask for this information, but CRAs won’t. 

QuidMarket has been helping people with payday advance loans since 2011. Feel free to use our application page if you are ready to make a short term loan application. There are no hidden costs or charges. 

We hope this makes the world of understanding credit easier and are committed to providing transparent information that empowers you. Contact us to find out more about our loans or use the handy calculator and we’ll get you the funds you need.

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