Personal Loan Repaid Yet Credit Score Is Low: What Lender Have to Say

October 30, 2019 8:55 am 0

Lenders believe that repaying personal loans is a big achievement. It not only benefits customers but also money-lending companies that lend huge sums of money. Then, why does credit score drops despite loan repayment? What is the reason for the same? The problem is not permanent and lenders have answers as to why the score plummets despite loan repayment.

Personal Loan Repaid

The lending process is not easy. For a loan application to seek approval, many factors are involved. Today, online lenders understand the risks associated with unpaid debts. They not only offer loans but also do financial counseling so that borrowers qualify for a personal loan. The most essential aspect is the credit score and credit history that matter as far as loan applications are concerned. It could be a marriage, home renovation, vacation, or any medical emergency loan, once repaid; the credit rating must improve and not plummet. 

According to an article published on https://www.huffpost.com, today lenders may not approve personal loans right away but can offer assistance in other ways. One of which is financial counseling, debt consolidation advice, and recommend loan products that best fit a customer’s financial needs. These little things matter when it comes to loan process approval, improving credit score, and making things simple for lenders and customers. Therefore, when the loan is paid off and yet credit score drops, here are some insights from lenders as to why it happens:

What happens after a loan is repaid

Once a personal loan is repaid, the lending company reports about the same and discontinues sending updates related to the monthly payments about a customer’s loan to the credit agencies. As these agencies have little info about a borrower, all things being the same, unexpectedly with no installment loan might cost a customer’s credit score for the time being.  

The continuous data related to the progress a customer makes on monthly loan payments adds to the total scenario of his or her financial strength. Therefore, when the personal loan is the sole installment account, it might appear as a bigger credit risk than previously. Then, each credit profile is different and there are a few reasons why credit score drops after loan repayment. 

Lenders cite that if customers have debts on revolving accounts that let them borrow money repeatedly, it becomes hard for credit agencies to ascertain if consumers are using credit in a responsible way or not. They might be simply not making any progress when it comes to loan repayment. 

When after repaying loans, again the same borrower applies for a new loan from a lender, it might be considered a negative impact on the finances of the borrower. Lenders recommend avoiding debts on revolving accounts because if loans are taken repeatedly, the credit score is bound to dip even the previous loan is paid off. 

Credit mix is essential for score

A credit score helps lenders to ascertain whether a customer makes on-time payments on the loan taken out from a bank or an online lending institution. Now, the credit rating does not take an individual’s income or paycheck and credit score agencies take installment loans that have good payment records as a powerful indicator of a stable monthly income. It also indicates that the lending company will get regular monthly payments on a loan. You can learn more by visiting https://www.libertylending.com/

It is the different kinds of credit accounts and loans, known as the credit mix playing a pivotal role in determining the credit score. In fact, reputed lenders consider credit mix as one of the most influential aspects to figure out the credit score. The total sum of debts matters the most. 

A few examples would make this point clear. For instance, people with the highest credit ratings have a powerful history of making timely payments each month as well as a sound mix of credit accounts like fixed-term, secured installment loans such as car and home loans, fixed-term and unsecured installment loans such as student education and personal debts. Besides, there are unsecured and revolving loans such as credit cards with very low balances and store charge cards.  

Lender’s recommendation on improving credit score

It could be exasperating to witness the credit score dip when lenders say that the financial stability of a customer has improved. Online lending companies ask customers to stay cool and patient. The best way to improve credit score is by maintaining a perfect mix and balance of credit accounts and payment history. The record must show that a customer is making on-time loan payments. Even if there is some setback, it would be temporary. 

Lenders recommend that improving the credit score is possible if the money used to repay the loan is utilized to pay off the other debts. 

Once this is achieved, two factors in the credit score are improved. One is the credit utilization and the other is the total sum of money owed. Lenders cite that the total amount is somewhat powerful for the credit score. Credit utilization, on the contrary, the amount of money owed is more influential. 

Lender’s advice on making credit savvy decisions

Lenders recommend using common sense and developing healthy financial habits to maintain a high credit score. Here are some of the best pointers from lenders: 

  • When lenders offer a vehicle, home, or credit card loan, they recommend doing so prior to or just immediately after the personal loan is repaid before the monthly installment payments vanish from the credit report. It is a piece of authentic advice from lenders to improve credit score. 
  • Lenders recommend the use of a personal loan and not a credit card when making a huge purchase on credit. The installment and paying the same each month on time would improve the credit score. 

Conclusion 

The lenders offering loans provide authentic information regarding loans, credit bureaus, and ways to improve credit score. It makes clear why the score drops after repaying the loan. Therefore, it is always better to take out a personal loan from reputed lenders having knowledge and experience in the industry. 

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