Many people are aware that the way they use their credit cards can have a dramatic impact on their credit score, but still fail to see that revolving credit is not the only route to a low credit rating, but instalment debt too can play a big part. There are different types of loans which you may need at different stages of your life. You may start off with an auto loan or student loan, and then progress to a mortgage or personal loan for some big ticket item such as furniture. Each of these must to be serviced with the same care as your credit card debt.
The one loan which people often fail to understand and have the most problems with is not actually their own, but one which becomes yours if you sign as a guarantor for someone else’s loan. Of course you will only find yourself caught in this trap if you have a good credit score of your own, which makes you a good risk for recovering a loan granted to a third party whose own credit score isn’t high enough for them to receive a loan in their own right.
Granted it could be that you co-sign a private student loan for your child who has not yet had the opportunity to establish a credit history, but as far as other people asking for this favor from you, stand strong and say no. There is a good reason why they can’t get a loan in their own name and your generous gesture could well come back to haunt you as the majority of co-signers end up being responsible for the loan they have endorsed.
Even if the third party loan is handled perfectly it can still impact your own credit score as it will be seen as one of your potential liabilities until it is paid off in full. This will lower your own debt to credit liability and may prevent you from receiving a loan of your own. If the third party turns out to be a reluctant payer the first time you realize this may well be when you have a collection agency on the phone, and your own credit score has fallen.
If you have a student loan in your own name it is most likely to be a federal loan, but the impact of falling behind on payments will affect your credit score. You must understand that the loan is with you until it is paid off in full, and even if you turn to the easy option of bankruptcy to ease your debts, your student loan will never be discharged. A private student loan is subject to the same non dischargeable terms.
Paying each loan you have with diligence will ensure that no negative activity is recorded on your credit file. In fact it is possible to approach the lender of a long term loan, such as a mortgage, and see if they are willing to offer you a better interest rate, if you notice that your credit score has risen since you signed the mortgage papers.
One of the best ways to achieve a high credit score is to demonstrate financial responsibility and stability, so always look to renegotiate long term interest rates on loans such as secured personal ones and mortgage loans, when your credit score is on the rise. Never co-sign a loan for a third party except a family member you trust implicitly, and make sure that every loan payment is met on time. Often you will be offered a discounted rate if you sign to pay by automated debits. By maintaining a high credit score through servicing loans in a responsible way you could well end up saving thousands in interest payments.