Taking a loan and how you manage it, is what affects your credit score. You start building your credit score from the moment you collect your first credit/loan.
Your credit score simply tells if you can be trusted to repay your loan or not. A good credit score indicates that you are able to repay your loan on time and perform other financial obligations. A bad credit score on the other hand, indicates you are unable to pay your bills on time and this can prevent lenders from giving you a loan or attract high interest rates.
According to FICO, there are five main credit score factors that account for a specific percentage of your credit score;
I. Payment history: 35%
II. Amounts owed: 30%
III. Length of credit history: 15%
IV. New Credit: 10%
V. Credit mix: 10%
So how do these affect your credit score?
When you apply for a new loan, lenders check your credit. When they do, an inquiry is put up and this can be a sign that you are in financial trouble or that you need money, so they pull your credit score down slightly. One or two enquires aren’t bad, as this only accounts for 10% of your credit score. However, when multiple inquiries are put up for you i.e. when you apply for multiple loans at the same time, this can affect your credit score badly. It is therefore advisable to keep away from submitting multiple applications for a loan with different lenders and finalize and close your loan applications on time.
Your credit report also shows every loan you are currently financing, as well as the monthly repayments. When you apply for a new loan, lenders look at your existing loans and the monthly repayments and other monthly financial obligations and decide whether or not they think you can afford an additional loan.
Defaulting on payments or paying your monthly dues late will do you no good at all. Your payment history accounts for 35% of your credit score. It is the most important factor that influences your credit score. So if you have a history of payment defaults or late payments, it will definitely hurt your credit score and scare lenders away from giving you loans.
Your credit score documents your journey as a borrower, therefore being responsible in taking loans and ensuring timely and successful repayment of your loans helps you build a strong credit score and assures lenders of your ability to repay your loan.