Does Borrowing Money Affect Your Credit Score?

You’re not alone if you’ve ever questioned whether taking out a loan or borrowing money might damage your credit score. Many individuals are concerned about how various activities may impact their credit rating. Keep in mind that your credit score is determined by your financial decisions and behaviors. Checking your score passively will not make a difference; however, making payments and other actions can help improve it.

Will borrowing money impact your score?

Yes, borrowing money will have an impact on your credit score, whether it’s through a home loan, a personal loan, or a credit card. Taking out a home loan or a credit card may raise your credit score, but having too many applications can lower it.

Every time you apply for credit, your name and credit report and score is checked. Your credit report will reflect badly if you have too many enquiries, and if your loan application is denied, your credit score will be harmed.

Other factors that impact your credit score

Besides borrowing money, there are several factors that impact your credit score in Australia:

1. Payment history: Timely payments positively affect your score, while late or missed payments have a negative impact.
2. Credit utilisation: The percentage of your total credit limit you use affects your score. Keeping utilisation below 30% is recommended.
3. Length of credit history: A longer credit history generally has a positive impact on your score.
4. Credit mix: Having diverse types of credit (e.g., credit cards, loans) can be beneficial.
5. Defaults and serious credit infringements: These have a significant negative impact on your score.
6. Court judgments and bankruptcies: These public record items can severely damage your credit score.
7. Personal information: Factors like employment duration and residential stability may indirectly influence your score.
8. Credit limits: The size of loans or credit limits requested can impact your score differently.
9. Directorship and proprietorship information: If you’re a company director or proprietor, this information may affect your score.
10. Age of credit report: A more established credit report may be viewed more favourably than a new one.

According to Equifax, credit enquiries/applications and repayment history account for over 75% of the score, making these the most crucial factors to focus on for improving your credit rating.

What you can do

Remember, how you handle your debt really does matters. So as long as you make payments on time, you could improve not just your credit score but also your overall credit worthiness. On the other hand, missing or delaying any payment is likely to result in a negative impact on your credit score.