Top 3 Ways Your Loan Affects Your Credit Score

 When a person borrows money from another person, he takes a loan. When the loan is taken from a person who is in the money lending profession, also known as a lender, a contract is signed and it states all the terms and conditions of repayment, interest and the date by which the loan has to be repaid.

If you repay the loan on time and meet your financial obligations responsibly, you have good credit and if you delay or default on your loans, your credit is bad. Defaulting on mortgages can lead to foreclosures et al. Good credit also results in good credit scores, which are checked by lenders.

1. 1. When you apply for a loan, the lender pulls your credit report for reviewing. This appears in the report as an inquiry. These inquiries affect the credit score and lower it, as 10% of your credit score is based on the credit applications that you make. Therefore, whenever you apply for credit, you are lowering your score. Lenders and financial institutions do not look favorably upon too many credit inquiries on your credit report.
2. 2. Another factor that affects your credit score is timely payment of all bills and loans. They form a part of credit history and as 35% of your credit score is based on your credit history, your score increases. Just as timely payment increases your credit score, late payment of mortgages and bills decrease your score and sometimes can result in foreclosure and repossession. 
Debt to income ratio should not exceed 30% of your total income.
3. 3. To understand the third factor that affects your loan, you have to understand a financial term, called as “debt to income ratio”, used by credit experts. This is another factor that affects you credit score too. Though debt to income ratio is not considered by FICO at the time of calculation of score, many lenders use it to know how creditworthy you are. A high ratio denotes that you are a credit risk and your loan application may get rejected.

As these factors, directly or indirectly, affect your loans, you must keep your credit report in good condition and if there are negative items, you must work to get them removed.