Are you looking to use a personal loan to consolidate your debt? If done right you are able to become debt free and improve your situation. But before getting a personal loan understand that there are ways that debt consolidation can hurt your credit score.
Personal Loans are outstanding when using them to improve your financial situation because they generally come with a lower interest rate than credit card debts. Also, personal Loans are fixed interest rates helping buyers plan ahead with a predictable payment that stays the same. Here are some ways getting a personal loan can hurt your credit score.
Being Late: Personal loans come with a predictable payment making it easy not to miss your monthly payment. However circumstances happen to all of us, that can make us miss a payment.
While we all might have a good reason why we are late on our payments, lenders expect us to fulfill our portion of the promise and get paid on time. If you are late on your payment it can significantly damage your credit score and stay on your credit history for up to 7 years.
The higher your credit score the higher the drop will be if you are late on your payment. So be sure to have the plan to protect yourself from being late on your monthly loan payment. Also if you are close to being late on your loan payment, be sure to reach out to your lender because some lenders have programs that can help you by extending your due date.
Hard Inquiry: It’s no secret when you apply for a loan lenders will do a hard inquiry on your credit score. Even though an individual hard inquiry might only drop your credit score anywhere from 5-10 points. This decrease could hinder your eligibility to qualify for other loans.
For example, if you are applying for a loan with a minimum requirement of 630 and your credit score is currently at 635. When the hard inquiry shows up on your credit report can lower your credit score to 625 cousins you do not qualify for the loan. That’s it’s vital to take into consideration the time frame when you are applying for a personal loan.
Ending the loan: It may seem surprising, but paying off a loan can lead to a slight decrease in your credit score. Usually, the reason for that is having a lengthy credit history is an important factor when determining your score. As you pay off your loan you are shortening the length of your credit account.
Even though this might be a surprise to some, its nothing that will hurt you exponentially. But just a minor stubble in your credit journey. Taking out a personal loan to pay off your debt could be a smart financial decision, but consider how loan application affects your credit score.
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