Bank Loans: How Can They Affect Your Credit Score?

Obtaining a business bank loan can help secure your company’s financial future. You may need those funds to pay for new equipment or expansion. In some cases, you might need to shore up cash flow. On the other hand, receiving a personal bank loan can help you make an investment or consolidate some of your financial debt. With either type, it’s important to understand how these loans can impact your credit score.

Loan Application Bank Finance Money Businessman Concept

How Loans Impact Credit Scores

Obtaining a bank loan is a good thing for many situations; however, it is essential to consider what this could mean for your credit score. Here are a few things that could happen:

Initial Drop Due to Increased Debt

If you are receiving a loan, you’re adding debt to your financial portfolio. Increasing debt can negatively impact your credit score. Adding more debt to your credit history can make future lenders less willing to work with you because it’s more of a financial obligation. 

On-Time Payments Could Increase Your Score

With a bank loan in place, you have a new opportunity to prove yourself as a savvy borrower. Make all of your payments on-time and try to pay more than what you owe each month. This can help to do two things:

  • It shows you are a responsible borrower that does not fail to make payments. Creditors like that and your credit score will improve as a result.
  • It enables you to pay down the debt you owe, improving your debt-to-income ratio into a more favorable place.

Set up automatic payments to ensure this happens. It is one of the best ways to minimize the risk of late payments.

Secured Loans May Boost Your Score

Credit reporting agencies like to see secured loans on your report. Though personal loans are not necessarily a bad thing, secured loans are less risky. This includes loans on real estate like a home or building as well as car loans. These loans also carry less risk to lenders. That means if you default on the loan, the lender can seize the asset holding that loan’s value.

Consolidation of Debt Opportunities

Another opportunity to improve your credit score through a bank loan is through debt consolidation. With this type of loan, you’ll obtain a new, larger one. You can then use that loan to pay off other debts you have. This may include credit card debts, personal loans, and different types of debts you have that are not secured by an asset.

A debt consolidation loan offers a series of benefits for you:

  • It clears up a lot of space on credit cards and other revolving lines of credit. That means your debt-to-credit ratio improves and can boost your credit score.
  • It increases the amount of available credit you have. For example, a new loan of $20,000 increases how much credit is extended to you, but when you consolidate, you are not adding more debt to that. This can also increase your credit score. 
  • It may make paying your debt easier to do by minimizing the risk of making late payments or missing payments altogether.

Debt consolidation loans can be hard to obtain. However, these bank loans may be an excellent way to get back on track financially.

Bank Loans for Businesses Help Create Financial Stability

It’s also important to look beyond the credit score to see what a bank loan can do to help your business (if you are applying for a business loan). For example, buying new equipment or inventory with a loan may help your business gain more financial security. This may allow for your business to grow and build revenue. That’s good for your company in the long term and, as a result, can help to boost the financial viability of your business.

It is important to remember that, as a business owner, your personal credit history could be on the line if you default on a business loan. If you used your credit score or credentials to qualify for the loan, that could mean your home or other assets could be at risk. 

Ask Yourself What the Long Term Looks Like

When trying to determine if a bank loan is the right fit for your needs, consider the long term. If you do not obtain the loan, does it limit your ability to pay other debt obligations or restrict your ability to build financial security? Would getting a new bank loan now help you to see growth later? That may make it worth it, even if there is a short-term drop in your credit score due to obtaining a loan.

Don’t overlook the value of a bank loan. Consider a few different options to find the best fit for your needs.

Interesting Related Article: “2021 best personal loans: how to choose the best option for your financial needs