Can Applying for Loans Bring Down Your Credit Score?

A credit score has many components. Each component weighs differently on your credit score. For example, having a late payment recorded on your credit report will cause more damage to your credit score than will having too many inquiries on your credit report. However, it is important to know that regardless of what the negative information is, such information will stay on your credit report for many years. As such, you will want to weigh the consequences of the negative impact on your credit score against the advantage of applying for and obtaining a loan.

Applying for a loan can negatively impact your credit score in more than one way. First and foremost, whenever you apply for a loan (whether it is for a house, a car, a student loan, a personal loan, etc.) the bank or lending institution to which you applied is going to run a credit check on you to calculate the risk involved in lending you the money. The riskier you are, the higher your interest rates and/or fees will be. If you are too risky, you will be denied a loan.

When the bank or lending institution conducts a credit report check to calculate the risk level involved, each check is recorded as an "inquiry" on your credit report. Banks and lending institutions look to see how many inquires are on your credit report for a set period of time. If you have "too many" inquiries, this tells the bank or lending institution that you are trying to borrow money and thus, this means that you are acquiring or attempting to acquire a lot of debt. As such, you may not have the money to pay back a loan. Therefore, this makes you a risky loan and you will either have to pay more interest and fees or will be denied outright.

However, even though these inquiries are recorded on your credit report, this does not mean that every one of them negatively affects you credit score. The key is not to get "too many." The exact number that crosses the "too many" threshold is not exact, but to be on the safe side, you should try to keep the inquiries to no more than 3 per year. Remember, every time that you apply for a credit card or any type of loan, an inquiry is recorded on your credit report.

The other way that applying for a loan can damage your credit score is if you are approved for the loan. If you are approved for a loan, it will affect your credit to debt ratio. If you get a loan, this will create more debt. The closer you are to "maxing out" your credit limits, the worse off your credit score will be. The reason for this is because if you have no available credit, banks and lending institutions will be concerned that you have reached your limits and will have trouble paying off your debt. As such, there is a higher chance that you will default and thus, a higher chance that the bank or lending institution will not get paid.

As stated above, because of these negatives, you have to weigh the cost of getting a loan against the benefits of obtaining the same. Make sure you are applying for and receiving a loan for a good purpose (buying a home that you can afford, getting a college education, making a good investment) and are not obtaining a loan for something you do not need.

Common Sense Credit

The term “common sense” is a misnomer. Some people believe that it is common sense to get only one credit card. Other people believe that credit cards are evil and, therefore, it is common sense to never own a credit card. Still, others believe that credit cards are a necessity in today’s financial times and, therefore, it is common sense to own more than one credit card. Who is right? The truth is that they could all be right, and they could all be wrong. Everybody has a different situation, therefore, “common sense” for their situation will dictate.

My “common sense” tells me that most of us will buy a home and/or a car in our lives. Therefore, unless you are paying cash, you will need to have established some kind of a credit score in order to qualify for the loan that is necessary to pay for these things. You cannot establish credit unless you open a credit account. The most common type of credit account is a credit card. It is true that you can get loans from your bank, but without an established credit report, you will have to secure these loans with some sort of collateral.

If you do own a credit card or credit cards, there is “common sense” advice for you to follow. First, use your credit responsibly. People do not get into financial trouble overnight. It is a gradual process that people refuse to acknowledge before it is too late. Constantly monitor your spending habits and financial statements so that you know when to stop spending or when your finances will allow you a little more leg room.

Second, pay your bills on time. You would be surprised how many people, who have the money to pay the bill, just plain forget to pay. As a result, their credit score suffers. If you are that forgetful or lazy, as the case may be, set up an automatic bill pay through your bank’s internet site. If your bank does not have such a feature, there are many companies that can set up an automatic bill pay for you.

Last, get updated, monthly credit reports from the credit reporting bureaus. By doing this, you will be able to see if any incorrect information is reporting on your credit report. By checking monthly, you will be able to dispute inaccuracies as soon as possible and, thus, minimize your damage. It will cost you about $12-15 every month to get all of your reports, however, think of it as financial insurance against inaccuracies and identity theft.

Do these “common sense” things and you will be able to obtain and maintain a high credit score and sound financial health.

What are the Pros and Cons of a High Credit Limit?

A high credit limit can be a great thing. First of all, it gives you more flexibility for purchases. Second, it gives you a lot of spending power. Last, it can increase you credit score because you debt to available credit ratio will be smaller. However, there are also some negatives that come along with a high credit limit.

As stated above, you will get more flexibility with your purchases, and you will have a lot of spending power with a high credit limit. While good in some respects, a high limit can get you into to trouble if you abuse it. If you have a high credit limit, this means that you have practiced responsible debt management. However, like most things in life, in you fall out of practice, you can get into trouble. Here, just because you have more spending power does not mean that you should utilize it unless you are making a planned purchase for a particular purpose. Do not make a big purchase just because you can. Doing this can turn the “pro” of having a high credit limit into a very big “con.”

Increasing your debt to available credit ratio can have a positive effect on your credit score. The interesting thing is that it can also have a negative effect on your credit score. It is all about timing. If you dramatically increase your debt to available credit ratio in a short amount of time, a credit reporting bureau may see this as you stockpiling credit in order to make a big purchase. This makes credit reporting bureaus nervous because they believe that you may not be able to pay off the big purchase (if made). Therefore, if you are going to increase your debt to available credit ratio, do it over a sizeable time frame and increase your credit limit in small monetary increments.

Both pros and cons exist with a high credit limit, but if you practice responsible debt management and increase your debt to available credit ratio over a sizeable amount of time, your high credit limit can be a powerful asset.