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You are here: Home / Personal Finance / Will A Personal Loan Affect Your Credit Score

Will A Personal Loan Affect Your Credit Score

16/12/2015 by AFB

In 2014, changes were introduced into credit score reports. History regarding personal loans is now scrutinised more thoroughly by lenders, meaning that if you have successfully paid off a personal loan on time and on schedule it will positively affect your credit score. On the other hand, defaults or recurring late payments will reflect badly on your credit score.

The changes to the system provide a more comprehensive overview of an individuals capacity for sound money management. Rather than only negative ‘black marks’ showing up on the credit report, positive information is also taken into account. Lenders and service providers will take previous financial management into consideration.

Credit scores are affected in a variety of ways:

  • Consistency of repayments for personal loans, credit cards, utilities, phone and mortgages
  • Bank accounts held at present and during preceding years
  • Credit card limits

 

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The beginning of financial independence

Naturally, not everyone has a long credit history that includes the full spectrum of financial dealings. This is especially applicable to younger Australians entering the workforce. However, it’s important to ensure sound money management from the get-go in order to generate an increasingly good credit score. It’s the norm for younger people to strike out on their own and experience independent living which will include getting a handle on rental accommodation including services and utilities. They may even require a personal loan for a car or household goods.

Almost overnight, we can be swept up into a cycle of borrowing and repayments, all requiring a dedicated commitment to maintain current lifestyle along with financial solvency. Even older Australians struggle at times in juggling finances and repayments. A personal loan is often one of our largest financial obligations, and paying it off on schedule will carry a lot of weight in generating a good credit score.

 

Getting caught in a negative spiral

A credit file that discloses payment defaults will make future loan approvals more difficult. If this is coupled with overdue bills, rental defaults or other financial negligence the credit rating will be further diminished. Ultimately, a bad credit rating will lead to fewer options, severely limiting the freedoms that the personal loan was meant to support in the first place.

Frustration at personal loan rejection can lead borrowers to make many loan applications in a scatter-gun approach, with hopes that at least one lender will reciprocate favourably. Be warned of this approach, as the newly introduced system also encompasses the past five years of applications for a loan or mortgage. In other words, lenders will take note of applications made and refused, along with the lower credit rating that will result from the refusals.

 

Positive benefits of a personal loan

A credit score that reflects good money management protects both borrowers and lenders. A personal loan as part of credit history displays a capacity for paying off ‘instalment credit’ that covers a significant time-frame. For this reason, there is no credit score benefit in paying off the loan earlier. Regular repayments made on time for a longer duration can actually create a better credit score reflection.

Nobody wants to be in financial difficulty, so it’s imperative to keep finances in order. Some people keep a payment calendar handy so important dates aren’t overlooked. Others like to have as many payments as possible automatically deducted from pay or bank accounts, reducing any accidental overspending.

 

Facing up to the challenge

If life throws you a curve-ball, and you hit a financial wall, there is no use trying to run and hide from the problem. Lenders, landlords, and service providers deal with unforeseen financial situations all the time, and usually have systems in place to reorganise repayments. Your credit score may be affected, but future lenders will also look at your ability to recognise difficulties and take appropriate action to avoid defaults.

A personal loan may not involve the biggest investment you ever make, but sticking to the repayment schedule will definitely generate a good credit score for future financial dealings.

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Filed Under: Personal Finance Tagged With: personal loan

About AFB

Author of a few blogs and a student for life, because there's always something new to learn.

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This blog was started because I realised that there aren't too many Australian personal finance blogs that write about personal investment tips, insurance, choosing the right credit cards and similar topics. Let me know if you'd like me to write about something new.

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