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How a Cash Loan Affects Your Credit Score


When you’re in a pinch and money is tight, a loan is an attractive option to reduce the strain on your wallet. But what are the long-term effects of taking out a cash loan? Does a loan adversely affect your credit score?

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Below we’ve compiled everything you need to know about how bad credit loans affect your credit score.

Paying off bad credit loans in a timely manner raises your credit score

A large percentage of your credit history is tied to your payment history. Making consistent payments on time, and paying off your loan as scheduled will help increase your score. Paying off your loan at an accelerated pace is also positive. On the inverse, repeated late, infrequent or missed payments impact your score negatively, as does not paying the minimum required payment.

Every time you fill out a cash loan application, your credit score dips

When you apply for a new form of credit (a cash loan, a credit card, a mortgage, etc.) the credit provider obtains a copy of your report. This enquiry is listed on your report. If you have a lot of enquiries in a short period, loan companies look upon it unfavourably. It indicates you are applying to a large number of loan companies and desperate to find a loan, or taking on more loans than you may be able handle responsibly.

High loan balances, or multiple loans can be viewed unfavourably

The total amount of your cash loans is another factor that is used to gauge your credit score. Higher total loan balances indicate you are a riskier borrower, because you already have a high repayment obligation. Lower cash loan balances are more favourable, because you have fewer other obligations to consider, and therefor are more likely to pay back your new cash loan.

The higher your debt-to-income ratio, the better

Your debt-to-income ratio is exactly what it sounds like – it’s the difference between how much money you make, and how much debt you have. Though your income isn’t included on official credit scores, many loan companies consider it a factor in your ability to pay back a loan.

The amount remaining on your cash loan is a factor

Taking out a cash loan and repaying it impacts your credit positively or negatively, depending on your remaining balance. If you’ve taken out a loan for $10,000, and have a balance for $2,000 left, this is considered a positive. Taking out a $10,000 loan and retaining a balance of $8,000, on the other hand, is looked upon less favourably. In other words, the larger the gap between your current loan balance, and the original loan balance, the better.

Being refused for credit and continuing to make loan applications is a negative

If you’re repeatedly denied credit, yet continue to make loan applications, it may affect your credit negatively. Loan companies view this as you being desperate to find a loan, despite being unable to pay down the debt sufficiently.

If you need a cash loan now, fill out a Magical Credit loan application now! We are a Toronto-based loan company that specializes in providing bad credit loans to people on government income, subsidies and pensions.