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Does getting a loan affect your credit score?

Taking out a loan – or any type of credit – will affect your credit score. Understanding the risks will help you make an informed decision.

20 October 2022Helen Tippell 5 min read
South African money.

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Your credit score helps your future lenders determine how responsible you were with credit in the past. It’s made up of the factors on your credit report, such as the number of accounts you have, how much of your available credit you’ve used, your payment history, and the length of your credit history.

Through ClearScore, you can access your credit score and report for free. Simply sign up or log in to find out which factors influence your score.

Taking out a loan can sometimes feel like an easy fix – especially if you have unexpected expenses. However, before you apply for a loan, you should make sure it’s right for you. You can read our article on how to use a loan responsibly.

If you decide to go ahead, the good news is that it can have a positive impact on your credit score. A loan can help you:

1. Build a strong payment history

Having a record of paying back credit on time and in full helps build your credit history. Since a loan is usually paid back over several months, if you make regular, timely repayments, you’ll be able to show future lenders that you can borrow responsibly.

2. Build a better credit mix

Having different types of credit can show lenders that you’re able to manage a variety of different accounts. If you already have a credit card that you pay back on time every month, a loan could help create a better credit mix.

3. Reduce your credit utilisation ratio

Credit utilisation refers to the percentage of credit you use every month in relation to your overall credit limit. It’s best to keep it below 30%, which means using less than 30% of your credit limit. If you regularly use more than this it may indicate that you’re a risky person to lend to.

If you’re struggling to keep up with your debt and your credit utilisation is too high, you may be able to take out a debt consolidation loan to pay it off. Once you do this, you’ll only have to pay off a single debt and it will likely have an overall lower interest rate.

If you pay it back responsibly and use less of your credit limit while you do, you could see a slow but steady rise in your credit score.

At ClearScore, we connect you with the top debt consolidation loans on the market. If you’re struggling to pay your credit-bearing accounts, then this is the perfect solution for you.

As with any type of credit, it’s important to understand the risks. Taking out a loan can do the following:

1. It adds a credit enquiry to your credit report

A credit enquiry happens when you apply for a loan and it will be shown on your credit report. It can make a dent in your credit score, which should be short-term as long as you pay it back in line with your credit agreement.

However, if you’re also looking for other types of credit, you may find it’s harder to get accepted. That’s because it can look like you’re desperate for credit and risky to lend to. A good rule of thumb is to wait about six months between opening credit accounts, but it depends on your circumstances.

2. It's a form of debt

Bear in mind that all credit is a type of debt. Borrowing money via a loan, credit card, or even a phone contract means you’re in debt for the amount you take out. If you’re taking out a loan, it’s important to be sure you can afford to make the repayments.

3. It can impact your payment history

A loan comes with interest fees so it’s important to manage the repayments responsibly so that you can avoid paying extra money.

If you miss a payment, your credit score can be negatively impacted. This will fade over time but a large drop in your credit score can impact the offers you’re seeing and your chances of being accepted for new credit.

It’s important to check up on your credit score regularly so that you’re aware of any changes that may be happening. You can access it through ClearScore 24/7 and for free.

There isn’t a specific score that you need to get a loan. However, there are factors that impact your chances. Generally, the better your score, the better the offers you have available to you.

On ClearScore, you can access different kinds of loans, depending on your specific needs. Each of these is also tailored to different credit scores, which means that there’s something for everyone.

If you log in, you will be able to see which loans match your credit profile. Remember, you can view your credit offers as often as you’d like. It won’t impact your credit score at all.

Yes, a personal loan will show on your credit report. This is because your report is designed to accurately represent the credit accounts you have. It shouldn’t be a problem if the information is correct and you diligently make the repayments. Any missed or late payments will also show on your credit report.

If you have an unexpected expense, you may be wondering whether it’s better to take out a loan or put it on your credit card. There are some differences to be aware of:

A credit card is a revolving credit account

  • This means the credit – or the money you borrow – can be rolled on to the next month, with interest. Rolling over your payments can increase your chances of falling into a pattern of debt.
  • You can use 100% of your credit limit, but it will affect your credit utilisation, which has a knock-on impact on your score and report. On the other hand, your credit score won’t grow if you don’t take out credit either. Therefore, try to keep your credit utilisation around 30%.
  • Your credit card might come with rewards when you spend – you should check if the benefits outweigh the potential risks.

A loan uses instalments

  • Unlike a credit card, you can’t carry a payment over to the next month – the monthly payments (instalments) are fixed. It can make it easier to budget because you’ll know what you owe in advance, but not making the instalments counts as a missed or late payment on your report.
  • Loans can come with lower interest rates and higher amounts than credit cards. You should make sure you can comfortably afford the repayments.
  • They may have additional fees, such as early repayment charges, and you should factor these in when thinking about your loan period.

You should get to grips with the charges and fees a credit card or loan comes with before using them for a large purchase. The option you choose will depend on your own needs and circumstances. Before you get started, you can read our article on whether you should get a credit card or a loan.

On ClearScore, we will match you with both credit cards and loans. You can view your offers anytime you want, and you can observe how your credit impacts your credit score.

Helen Tippell  Image

Written by Helen Tippell

Digital Copywriter

Helen's our resident Digital Copywriter. She makes personal finance easier to understand so you can be ClearScore sure about your choices.