Is That Your Loan Balance or Your Phone Number?!

To understand the impact of loans on your credit score, as a mortgage broker, we must first take a step back to understand the foundation of loans and credit. When someone borrows a loan, they agree to make a certain number of payments, known as a loan payment, for a certain loan amount by a particular date each month. A credit score represents the amount of trust lenders have that someone will be able to repay their debts and financial obligations on time. A good, or higher, score suggests they are very timely with payments, whereas a bad score suggests they are not very trustworthy with repaying what is owed.

What most people don’t realize is that your loan payments, including those for student loans and St. Louis home loans, and even the process of borrowing the loan has an impact on your credit score.

Loan applications can lower your credit score because 10% of your score comes from the number of credit-based applications you make. Every time you apply for a credit card or a loan, an inquiry is placed on your report to show that a lender has reviewed your score, thus several inquiries in a short period of time may suggest desperation. However, applying for federal student loans is different due to a grace period.

Once you’re approved for a loan, whether it’s a student loan, personal loan, or home equity loan, it’s imperative to consistently make your monthly payment on time because payment history comprises 35% of your credit score. Timely payments will improve your credit score, whereas late loan payments, especially on a student loan or mortgage, will severely hurt your score.

The loan balance of your loan also has an impact on credit because you gain score points by paying that amount down. This means that the larger the gap between your original loan amount and your current outstanding loan balance, the better your credit score will be. Managing your debt, particularly credit card debt and student loan debt, effectively is crucial.

Although outstanding debt, like unpaid interest or accrued interest on a student loan interest or loan interest in general, may not directly impact your FICO credit score, be aware that lenders consider income a factor in your ability to repay a loan. A high debt-to-income ratio, especially if you have a substantial student loan balance or total loan balance, may increase your risk score with a loan servicer or lender, ultimately causing you to be denied. Understanding how loan borrowing, including federal loans, private student loans, and the interest rate attached to them, can impact your credit score is the first step to responsible lending habits. If you still have questions or are curious about the impact of loans, such as student loan forgiveness or public service loan forgiveness, on your score, don’t hesitate to call a Liberty Lending Consultant today. They can even assist with understanding loan terms, interest charges, and using a loan calculator to plan for your loan repayment.