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.

Companies that Improve your Credit Report for a Fee

It is true that many companies exist that will claim to clean up your credit report for a fee. Some of these companies are less than ethical and some are outright scams, however, there are many legitimate companies that will clean up your credit report for a small fee. Many people believe that all of these credit repair companies are cheats that take your money and do no work to help you out. This is simply untrue. The company that I used to clean up my credit report definitely did its job, and has helped me raise my credit score over 100 points over the course of one year.

Many skeptics argue that everything that these companies do can be done yourself for less money. This is 100% true, however, I do not see how that is relevant. I can make dinner at home for less money than going to a restaurant. However, under the skeptics logic, I should not go to the restaurant because it will cost more than making dinner at home. The point is, if you use a credit repair company, you are paying for experience and convenience. Of course you can do everything yourself, however, if you pay a company to take care of the problem, this means less work for you and, if the company is reputable and experienced, faster results.

Does this mean that you should use a credit repair company no matter what? No, you should not use one of these companies no matter what. If you decide that your credit report needs to be repaired, you should analyze your situation and decide which option (paying a company to do it or doing it yourself) is best for you. Either way, if done correctly, the results will be worth the time and money.


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What Does a Credit Score Mean to You?

There are many frequently asked questions by people who are not entirely clear as to the significance of a credit score. These people understand that a high credit score is good because it will help them get loan approvals and lower interest rates, but these same people do not know how high their credit score needs to be in order to obtain these advantages.

A FICO score ranges between 300 to 850. Obliviously, if you have a credit score of 850 you have nothing to worry about. You have reached the pinnacle of credit worthiness and will get the best interest rate and best loan, guaranteed. However, what if I have a score of 720? Will a score of 720 get me a better interest rate than a score of 715? A score of 720 is higher than 715, thus, many would conclude that a 720 would get favorable interest rates and loans. However, such is not the case. Lender will treat a score of 715 and a score of 720 the same. Why?

In addition to being scaled between 300 to 850, most lenders create credit score categories. These categories have various different names depending on the lender, but generally, the credit scores are broken into 5 categories and have names similar to (1) Poor; (2) Fair; (3) Average; (4) Good; and (5) Excellent. The lender will then take your score and put it into the appropriate category. Once you are placed in a particular category, you are given interest rates and loan terms based upon that category.

Generally, a lender’s ratings are as follows: (1) Poor is equal to credit scores 619 and below; (2) Fair is equal to credit scores 620-659; (3) Average is equal to credit scores 660-720; (4) Good is equal to credit scores 721-749; and (5) Excellent is equal to credit scores 750 and over. So, what is the point I am making? The point is, a score of 715 is not different from 720 for lending purposes. Therefore, you do not need to worry about these couple of points when applying for a loan. The only thing you should worry about is the point difference between the categories. In other words, if you have a 720, you should try to boost your score a couple of points so that you can get the more favorable terms and interest rates given in the “Good” category.

Additionally, remember that your credit score is based upon the time it is pulled. Therefore, your 720 today could be 718 or 725 tomorrow. Everything such as paying a bill, taking out a loan, getting a new credit card, getting a larger credit line on an existing credit card, and/or having a credit card for more than three years will affect you credit score. Because many people do at least one of these things several times per month, your score will thus change several times per month. This is one of the reasons why lenders do the category system.

The point is, take care of your credit score, do not worry about the points in the same category (because, based on our example, a 660 will get the same rates and loans as a 720), and strive to get your score into the highest category.



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How I Raised my Credit Score

About two years ago (October of 2005) my credit score was in the 620s. In case you are wondering, a score of 620 is not particularly good. In fact, it is a bad credit score. Today, my credit score is over 740. A score of 740 ranks in the top tier of creditworthiness. How did I raise my credit score over 100 points in less than two years? Before I answer this question, I need to give you a little background information.

My credit score was low because I had late payments on my credit report. Late payments can stay on a credit report for up to 7 years. I did not want to wait 7 years because I had plans for certain types of investments. These investments required a decent credit score, and thus, I needed to find a solution.

First, I obtained a copy of my credit report. I noticed that some of the negative accounts on my credit report were not even mine. One of the negative accounts was opened when I was 6 years old. I called the credit card company and asked them when the started giving out credit cards to children in the first grade. The stunned silence on the phone proved to me that they got the point. The negative accounts that were not mine were removed from my credit report. This increased my credit score.

Second, I got a referral from my real estate teacher for a company that will fix a credit report. I called the company, paid a small fee, and followed the instructions that they gave me. Basically, I was told to continue to pay my outstanding balances in a timely manner and to refrain from using and applying for any credit cards. The company would contact the credit reporting companies and dispute any negative information on my credit report. Less than two years later (which is far better than 7 years) I sit with a score of over 740.

If this plan of action does not work for you, you can always pay your cards on time, reduce your outstanding balance, and wait for any negative information to be removed from your credit report. The choice is up to you.