Does a solar loan have an impact on my credit score?
If you’re in the market for a rooftop solar system, you may be talking to your bank or a specialty solar lender. While some homeowners pay for their systems with cash, most homeowners will need to finance their home improvement project.
Before you get too far down the path with any single lender or make critical financing decisions, it’s helpful to have a thorough understanding of what a residential solar loan can mean for you. More information helps guide you towards the right financial decisions, including whether to finance your system and how to choose the right lending partner!
The basics of a credit score
A credit score is one of factors lenders use to determine creditworthiness. This is the same for your residential solar loan and for any other extension of credit you may be seeking.
So before addressing the solar loan specifically, it’s helpful to review the characteristics that make up your credit score. Each of the major credit bureaus (Equifax, Transunion and Experian) calculate your credit score in slightly different ways, but the basics are the same.
Your credit score is generally comprised of 5 major characteristics:
- Used versus available credit (approximately 30%)
- Payment history (approximately 35%)
- Types of credit or your credit mix (approximately 10-15%)
- New credit (approximately 10%)
- Length of credit credit history (10-15%)
How a residential solar loan application impacts your credit score and access to credit
The primary ways a residential solar loan can impact your credit score are:
- Amount of loan.
Lenders can view the total amount of credit extended to you at any given time. Ensuring borrowers aren’t buried in too much debt is just one factor that responsible lenders take into account when reviewing applications for credit. For your residential solar loan and every application of credit afterwards, this may be the difference between getting approved by a low-cost lender or a payday-like lender. For this reason, it’s important to keep the amount of debt you have to a minimum at all times. Choosing a loan that limits your debt will be critical to maintaining control over your credit score and financial health.
- Applications for credit.
A hard credit inquiry can temporarily lower your credit score. Soft credit inquiries, on the other hand, do not impact your credit score. For this reason, when shopping for a residential solar loan (or any loan for that matter!), make sure your lender isn’t performing a hard credit inquiry until you are absolutely sure you want to move forward with that loan application. All lenders will require a hard credit inquiry prior to entering into a credit agreement, so while it's unavoidable, you can limit the impact on your credit score by keeping these inquiries to a minimum.
- Comprehensive credit mix.
Your credit report takes into account performance on your different loan types. Many lenders look at the performance of similar types of loans when making the underwriting decisions. For example, if you are not paying back an auto loan, you might find it particularly difficult to get approved for another auto loan. Since your solar loan represents a meaningful amount of debt, many lenders will use the performance of this loan as a barometer for future credit needs, especially for those bigger ticket items like cars and homes.
How to maintain a strong credit score
There are several things you can do to maintain good credit. While there are lots of informative articles that provide a more in depth review of this topic, we’ve summarized three key habits.
- Pay your bills on time.
Payments made over 30 days late are typically reported by your lender to one or all of the credit bureaus. How far behind you are on a bill payment, the number of accounts that show late payments and whether you’ve brought accounts current are all factors that contribute to your credit score. Most negative marks, including late payments, last for up to seven years on your credit report! Paying your bills on time is one of the most influential things you can do to strengthen your credit score. When it comes to your residential solar loan, these same rules apply. Set your account up on auto-pay to reduce the risk of late payments and the potentially damaging impact on your credit report.
- Use a low percentage of available credit.
Credit models often look at the utilization rates of your revolving accounts. Beyond the added interest expense associated with maintaining high balances, a higher utilization of available credit may indicate to lenders that your current cash flow is at risk or that you may be having difficulty paying off your debt. A good rule of thumb by credit bureaus is to keep your utilization at or below 30% capacity of revolving credit facilities.
- Only apply for credit when you need it.
Though applications for new credit aren’t among the largest contributors to your credit score, it is worth considering. Only applying for credit (and triggering a hard credit inquiry) is an easy way to ensure your credit report is as strong as possible.