Borrowing money is an essential aspect of personal finance. Whether it’s to buy a house, or a car, or to cover unexpected expenses, borrowing money is often necessary to achieve our financial goals. However, taking out a loan can be difficult if you’ve struggled to manage your money in the past – thankfully, this is where bad credit loans come in. But how much do you know about your credit score and how borrowing can affect it?
We’ll explore how borrowing money can affect your credit score and the key considerations to keep in mind below.
Understanding Credit Scores
Before we dive into how borrowing money can affect your credit score, let’s first understand what a credit score is. A credit score is a three-digit number that ranges from 0 to 999. This number reflects your creditworthiness, which is an indication of how likely you are to pay back a loan. The higher your credit score, the more creditworthy you are.
Several credit bureaus calculate credit scores, but the most commonly used one is the FICO score. The FICO score is calculated based on five factors: payment history, amounts owed, length of credit history, credit mix, and new credit. Let’s take a closer look at how each of these factors can be affected by borrowing money.
Payment History
Your payment history is the most important factor that affects your credit score. This factor looks at whether you’ve paid your bills on time or not. If you make late payments or miss payments altogether, your credit score will be negatively impacted. When you borrow money, you need to ensure that you make your payments on time, as this can significantly impact your credit score.
Amounts Owed
The amounts owed factor looks at how much debt you have in relation to your available credit. If you have a high amount of debt about your credit limits, your credit score will be negatively impacted. This is because it indicates that you may be overextended and may have difficulty repaying your debt. When you borrow money, it’s important to consider how much debt you already have and whether you can manage any additional debt.
Length of Credit History
The length of your credit history is another factor that affects your credit score. This factor looks at how long you’ve had credit accounts open. If you have a long credit history, it can positively impact your credit score. When you borrow money, it’s important to consider how this may impact the length of your credit history. For example, if you take out a new loan, it will lower the average age of your credit accounts.
Credit Mix
Your credit mix is another factor that affects your credit score. This factor looks at the types of credit accounts you have, such as credit cards, loans, and mortgages. If you have a mix of different credit accounts, it can positively impact your credit score. When you borrow money, it’s important to consider how this may impact your credit mix. For example, if you only have credit cards, taking out a loan may improve your credit mix.
New Credit
The new credit factor looks at how many new credit accounts you’ve opened recently. If you’ve opened several new credit accounts recently, it can negatively impact your credit score. When you borrow money, it’s important to consider how this may impact the number of new credit accounts you’ve opened recently. For example, if you’re planning to apply for a mortgage soon, you may want to avoid opening new credit accounts in the months leading up to your application.
Borrowing money can have a significant impact on your credit score. It’s important to understand the factors that affect your credit score and how borrowing money can impact these factors. When you borrow money, it’s important to ensure that you can manage any additional debt and make your payments on time.
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Source: Vietnam Insider