Getting an unsecured loan can have several benefits especially to quick assistance on an urgent financial matter. This is what makes the loan popular among borrowers. You require no collateral to secure it, only a good credit score. Once you decide to apply for it, then you can use it as you see fit. There are no restrictions on what or how you should spend the lent money.
An unsecured loan does come with some disadvantages which you have to keep in mind before signing those documents. It’s charged a high interest rate which means your monthly payment goes up and so does the total amount you pay back to your lender. This loan has no limitation on what to use it on meaning you can use it to offset credit card debt. If then you use those same cards to get yourself into more debt then a vicious cycle is set. Learn more about Unsecured Loan Advantages vs Disadvantages.
What is a Credit Score?
A credit score is a value used to determine your creditworthiness depending on personal files on your previous credit. This helps a lender determine whether you can pay back your loan on time. When you get a high credit score then you are financially sound and can pay back your loans and debts without any concern. Learn more about Are Unsecured Loans Bad For Credit.
FICO (Fair Isaac Corporation) is the company that came up with the credit score which now is used by many financial institutions across the world. Just because you have a low credit score doesn’t mean you’re doomed. You can raise your score by taking fewer loans and paying back your debt.
Still, a bad credit score can negatively affect your life making it much harder even to get a credit card. Remember this is what a lender looks at to determine whether to give you an unsecured loan or not. Even if you manage to get a loan, you notice your interest rate is higher than that charged on someone with a higher score. You even get less time to repay your loan in full.
The best option is to maintain high scores of above 700 and keep your borrowed loan minimal. With this, you can negotiate better terms for your loan including lower interest and a longer repayment period.
How to Improve Your Credit Score
You should improve your credit score if you want lenders to see you as creditworthy in the future when you need an unsecured loan. To start with, pay all your debts in full. Check through your finances and come up with a repayment plan for all the debts you have. You don’t have to pay it off all at once, but have in place a payment plan. Once you’ve done this successfully, your credit score improves.
Increase your credit line by calling the credit company to see if you can get an increase in your limit. Once you get it approved and your limit is increased, keep this amount and don’t use it. What this does is improve your utilization of credit by improving it.
Avoid closing a credit card just because you’re not using it, it’s best to just keep the account open and keep the card away than call the company to close it. By closing it, you stand a chance of hurting your score by having your rate of credit utilization spike.
Effects of an Unsecured Loan on Your Credit Score
An unsecured loan, for example, a personal loan can have an effect on your credit score. You can take a loan and it has a positive or negative effect. Taking a loan doesn’t in itself affect your credit score, depending on whether you pay it back or not, the effect is seen.
Positive Effects of an Unsecured Loan on Your Credit
1. Timely Payment
When you take a loan, you have an agreement with the lender on how and when to pay it back. When you faithfully keep up with the payments and finish the loan as agreed, then this gives a boost to your credit score. Also, the lender is able to trust that you with a larger amount in the future. Timely payment has a positive effect on the loan amount you get the next time you request one.
2. Credit Mix
Proving to other lenders that you have a positive credit score and are capable of paying back a loan is essential. You can even have the option of getting an unsecured loan from different lenders mixing up your credit means. When you have a reputation for paying back your loan, you have more freedom on the lender you use. You can seek a lender with more favorable terms and get more money as well.
Negative Effects of an Unsecured Loan on Your Credit Score
1. Plunging More into Debt
Getting an unsecured loan to repay another loan can start a vicious cycle that only ends in disaster. Once you use this money to pay a loan, you have to get more to pay this loan and so on. Each time you get a new loan it’s for a higher amount than the previous one and incurs a higher interest rate. This increases the amount you have to repay and strains your monthly budget. At some point, it might all become too much and you stall your payments which reduces your credit score immensely. Be sure to inform yourself on options if you can’t repay a loan.
2. Hard Lender Inquiries
With every loan that you request from a lender, they have to do a deep dive into your finances which includes asking for your detailed credit score. One inquiry every now and then only has a little effect on your credit score. However, a deep dive that results in numerous requests in a short period sees your credit score take a hit. You end up with a much lower score due to continuous debt.
If you want a score that shows you are financially sound, you should maintain a high credit score. This means a lender is in a better position to trust you with a loan and at a lower interest rate. When your credit score is bad, your loan request ends up denied by the lender, and even if you get it, the interest rate charged is too high. When you are ready, find one from Best Unsecured Loans.