A credit score is a calculation of how much risk you represent to lenders when you apply for a loan or some other form of finance. We all have a credit score, and this number, which borrowers are often not aware of, plays a big part in determining how much money you can borrow, for how long, and how much it will cost you.
Many different factors go into calculating your credit score, and importantly, even applying for a loan online could have an impact.
How do loan applications impact your credit score?
Most lenders will initially let you see your eligibility for a personal loan by performing what is known as a ‘soft check’ on your credit report to assess your creditworthiness. This will not have any impact on your credit score.
When you formally complete and submit your loan application, the lender will then make an official request for your credit file, known as a ‘hard check.’ This will typically stay on your credit report for 12 months and will have some impact on your credit score. How much of an impact it has can differ and will depend on factors such as how many loans you have had in the past, how much credit you currently have, and your repayment history.
If you have taken out a few loans in the past and have repaid them on time, the effect of applying for a loan online on your credit score should be very small.
Can applying for a loan online improve your credit score?
The act of applying for a loan online in itself cannot improve your credit score. The hard checks the lenders run mean you’re always likely to see a slight dip in your score initially.
However, over time, a personal loan can help you establish a positive repayment history, as long as you make all your repayments on time and in full. Positive repayment history makes up a large part of your credit score, so as counterintuitive as it may seem, someone who has had personal loans that they have repaid on time will usually have a higher credit score than someone who has never taken out a loan.
This guide from Wonga explains in more detail how applying for a quick loan online (and obviously paying it back) can, in some circumstances, boost your credit score. However, they are quick to advise that there are much better ways to go about doing this than taking out a loan. The guide also includes many other useful facts and tips about your credit score relative to accessing loans. The guide is about a ten-minute read but well worth the time.
How can applying for a loan hurt your credit score?
The regulated lenders want to avoid lending money to anyone who uses credit irresponsibly. Therefore, your credit score will be more affected by your loan application if you have applied for and been refused multiple loans from other providers or if you’ve applied for other forms of credit recently.
To avoid making multiple credit applications, many lenders offer online tools that allow you to see what interest rate you’re likely to qualify for, the repayment period, and the total cost of the loan before you apply. Getting this type of estimate won’t hurt your credit score and will help you make an informed borrowing decision.
Where can I get my credit score?
You are entitled to read your credit report once a year for free, which you can do at credit reference agencies such as Experian or TransUnion. ClearScore also gives you ongoing access to your credit score for free, along with a monthly credit report.