poor credit score

The Impact of Your Debts on Your Credit Score

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If you’re paying several loans at once, you’ve likely already known the importance of a good credit score. The higher your score is, the higher your chances will be of securing the best mortgage rates in your chosen city, acquiring another credit card, etc. On the contrary, the lower your credit score is, securing any loan with favorable rates will be challenging.

So, if you have multiple credit cards, a student loan, a car loan, and a mortgage, how is your credit score affected by all of those? Do you need more debts to improve your credit score or should you cancel some of them?

Let’s identify the typical loans we acquire and learn about their impact on our credit score.

1. Student Loan

Many young Americans lament the burden of paying off student loans, with some of them being late on their dues, for reasons that may be out of their control. Thankfully, late payments on student loans do not always affect your credit score.

However, you are only allowed to be late within the grace period given by the type of student loan you have. If it’s a federal student loan, your provider can wait until 90 days for your payment, and if it’s a private student loan, you have only 30 days.

If your dues remain unpaid after the given number of days, your lenders will report your late payment to the credit bureaus, and that’s what will hurt your credit score.

2. Car Loan

An auto loan will affect your credit report and your credit score. You’ll lose score points after acquiring your vehicle, but you’ll earn them back if you’re consistent on your timely payments.

With regards to its impact on your credit report, a car loan is reported as an instalment account, like a mortgage. As such, your credit profile may benefit from the car loan if you don’t already have an existing instalment loan.

Your credit report should also indicate that you’re paying on time by noting your dues as “current” or “paid as agreed.” Ensure that you’ll always pay on time, otherwise, you risk your car of repossession if you fall 30 days behind your payment.

3. Mortgage

mortgage loan contract

Like a car loan, a mortgage will also cause your credit score to drop until you’ve proven yourself capable of repaying it. A mortgage will be one of the biggest loans you’ll acquire, so it’s advised that you wait at least six months before applying for another loan again. Besides, since your credit score is still recovering, trying to obtain another loan may be a rocky road for you, anyway, so focus on making consistent timely payments first.

4. Credit Cards

Despite being a form of debt, having a credit card is actually beneficial. It is one of the easiest ways to build up credit. To maintain a good credit score from your credit cards, avoid maxing them up, or you may be deemed a risky borrower by your providers, eventually hurting your credit score. Instead, keep your credit balance 30% below your credit limit, and always pay your dues on time.

Try to limit the number of your credit cards as well, but don’t cancel any unused ones. The longer you keep your credit cards open, the better it is for your credit score.

5. Personal Loans

Since personal loans don’t have collateral, it can be enticing to get as much as of them as you will be allowed, but if you’re already juggling too many personal loans, not only will your credit score hurt, but your chances of securing other loans as well, like a car loan.

Simply put, any loan you get will initially strain your credit score, and you’ll only earn your lost points back when you make consistent payments. That said, only take out a loan that you can surely repay. Don’t abuse the power of your credit.

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