{"id":42,"date":"2020-02-11T12:00:00","date_gmt":"2020-02-11T12:00:00","guid":{"rendered":"http:\/\/www.consumerslaw.com\/blog\/how-borrowing-more-raises-your-credit-score-forbes\/"},"modified":"2024-05-22T09:47:57","modified_gmt":"2024-05-22T13:47:57","slug":"how-borrowing-more-raises-your-credit-score-forbes","status":"publish","type":"post","link":"https:\/\/www.consumerslaw.com\/blog\/how-borrowing-more-raises-your-credit-score-forbes\/","title":{"rendered":"How Will Borrowing Money Affect My Credit?"},"content":{"rendered":"

\"Getting<\/p>\n

Taking out a loan can help you build your credit.\u00a0 But remember, to get that benefit, loans must be paid back in full and on time, and according to the terms of the loan agreement.\u00a0 When these terms are not met, the lender can take steps to repossess collateral and collect any money that is owed.\u00a0 As a result, the defaulted loan can be listed negatively on credit reports and lower your credit scores.<\/a><\/p>\n

Let\u2019s take a closer look at how this all works.<\/p>\n

<\/p>\n

\"ExcellentWhat is the difference between a credit score, credit furnisher and credit reporting agency?<\/h2>\n

Banks and lenders use your credit score to decide whether they\u2019ll approve you for new credit.\u00a0 A credit score is a three-digit number that relates to the payment history on your accounts.\u00a0 When a prospective lender looks at your credit report and sees that you\u2019ve got a history of borrowing and repaying loans on time, they\u2019ll view you as a good risk, and have confidence that you\u2019ll do so with them.<\/p>\n

If your credit payment history has been inconsistent, a prospective lender may view you negatively and as a high risk for repayment of the loan. Consequently, your loan application may be denied, or you may be offered less favorable terms, such as a higher interest rate, reduced loan amount, or an onerous payment schedule.<\/p>\n

Credit furnishers\u2013 banks, mortgage lenders, credit card companies and other financing companies \u2013 provide consumer\u2019s account data to the credit bureaus.\u00a0 The furnisher\u2019s responsibility is to provide accurate information to the three main credit bureaus, Transunion, Experian and Equifax. The credit bureaus generate reports that show the consumer\u2019s account history and illustrate whether he or she may be a good credit risk.\u00a0 Both the credit furnisher and credit bureaus are responsible to provide a consumer\u2019s account information accurately.<\/p>\n

Before applying for a loan, consumers should check their credit reports for accuracy. If the reports list errors, the consumer must send written disputes to the credit bureau. If the errors are not corrected, the consumer\u2019s credit score may drop, ultimately jeopardizing his or her ability to be approved for a loan.<\/p>\n

When should I borrow money?<\/h2>\n

Only borrow money when you need to and in ways that make good financial sense. \u00a0For example, borrowing to buy a home or for your education can yield more money in the long run. You build up equity in a home and can even sell it at a profit; or, getting a degree can increase your earning power.<\/p>\n

Taking on a new loan demands responsibility.\u00a0 You must be able to pay it back in order to have it benefit your credit.\u00a0 Obtaining loans to pay for recurring expenses, such as utilities, do not make good financial sense.\u00a0 You may need to consider other ways to satisfy those obligations, such as reorganizing your budget or taking a second or part-time job.<\/p>\n

How does my Debt-to-Income Ratio impact my ability to borrow?<\/h2>\n

\"Debt<\/p>\n

Taking on new loans can reduce your ability to borrow. When you apply for a new loan, lenders will look at your existing debts and calculate your debt-to-income ratio (DTI) to determine whether you\u2019ll be able to take on another monthly payment.<\/p>\n

Your DTI is the percentage of your monthly income, before taxes, that goes toward paying all your debts.\u00a0 A high DTI indicates the consumer has a lot of debt to juggle and may have a hard time making payments.\u00a0 A prospective lender may choose to deny a loan application when the borrower\u2019s DTI is too high.<\/p>\n

Many times lenders will look at your \u201ccredit mix\u201d or the balance of credit on your report. \u00a0A mix that includes an auto loan or a mortgage is better than one that only includes credit cards, and may impact your credit score positively.<\/p>\n

What happens when you miss payments?<\/h2>\n

\"\"If you miss loan payments, your credit score will drop, making it harder to borrow in the future. As well, a lower credit score can impact existing credit.\u00a0 Current creditors may elect to increase interest rates or lower credit limits.<\/p>\n

When the borrower misses payments, the creditor may choose to place the debt in collection.\u00a0 Between collection calls and letters, the pressure may become intolerable at a time when you\u2019re trying to balance the challenges of a financial hardship.\u00a0 The borrower may benefit by contacting the creditor to discuss alternative payment options in advance of the collection phase.<\/p>\n

When is a good time to apply for a new loan?<\/h2>\n

Lenders will run a credit check with each new loan application, creating an inquiry on your credit report. Inquiries can signal that you\u2019re in financial trouble and need money, which could lower your credit score. Numerous inquiries and credit denials may damage your score and make it difficult to get approved for a new loan.<\/p>\n

For people with higher credit scores, this drop is usually nothing to worry about. But if your score is lower \u2013 or you have a shorter credit history \u2013 this drop can be the difference between getting approved for the new loan or not.<\/p>\n

Good credit is important. So is an accurate credit report<\/a>. Always request your credit score and credit reports before submitting a loan application.<\/p>\n

Should I co-sign a loan?<\/h2>\n

Co-signing a loan for someone else can affect your credit score and ability to get credit of your own. Be sure that co-signing is a good financial decision for you.\u00a0 As a co-signer you are lending your name and good credit history to the primary borrower. \u00a0The downside of being a co-signer may include:<\/p>\n