There’s no mystery to it: A personal loan affects your credit score much like any other form of credit. Make on-time payments and build your credit. Any late payments can significantly damage your score if they’re reported to the credit bureaus.
Here’s how getting a personal loan can impact your credit score at each step of the process.
Shopping for a personal loan
Many lenders allow you to pre-qualify for a personal loan with a soft credit check, which is a routine check of your creditworthiness. A soft inquiry won’t affect your credit score and allows you to shop for the best rates and terms.
Some banks and credit unions do not offer a soft check with pre-qualification. If you want to compare rates, opt for lenders that offer the soft check.
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Applying for a personal loan
Formally applying for a personal loan triggers a hard credit check, which is a more thorough evaluation of your credit history. The inquiry usually knocks up to five points off your FICO credit score. A hard inquiry typically stays on your credit report for two years but only affects your score the first year.
Getting a loan
New credit accounts make up 10% of your FICO score. If you’ve opened several new accounts in a short span of time, getting a new personal loan could cause your credit score to dip.
A new loan may also shorten the average age of your total credit history. Length of credit history represents 15% of your FICO score, and a longer credit history is considered better than a shorter one.
If you don’t have any other installment loans, a personal loan will diversify your credit mix, which makes up 10% of your score. Successfully managing a mix of different types of credit — such as installment loans, credit cards and retail accounts — benefits your credit score.
Repaying a personal loan
Both FICO and VantageScore, another credit scoring model, consider payment history the most important factor in calculating credit scores, making up 35% and 41% of your score, respectively. Making payments on time can build your score.
Reputable lenders report repayment activity to at least one of the three national credit bureaus — Equifax, Experian and TransUnion. Working with a lender that reports to all three can mean more consistency across your credit reports.
Missing a loan repayment
Missing a due date by a few days may not affect your credit, but lenders can report payments that are more than 30 days late to the credit bureaus, leading to notable damage to your credit score.
Establishing a budget that accounts for all your debt repayments, including your personal loan, can help you avoid missed payments. Set up automatic payments to ensure you pay on time.
Consolidating your debt
Consolidating high-interest credit card debt into a personal loan can improve your credit by lowering your credit utilization. Your credit utilization ratio — how much of your available credit you use — is an important factor that helps determine your overall credit score.
Debt consolidation can also simplify your finances and help lower your monthly payments so you can pay off the debt sooner.
Frequently asked questions
Does a personal loan hurt your credit score?
Your credit score can dip a few points when you formally apply for a personal loan, but missed payments can cause a more significant drop. Getting a personal loan will also increase the amount of debt you owe, which is one of the factors that make up your credit score.
Does a personal loan help your credit score?
Consistent, on-time payments toward your loan can help you build credit. A personal loan also adds installment credit to your report, which differs from the revolving credit associated with credit cards. Credit mix makes up 10% of a FICO credit score.
FAQs
Hard credit checks temporarily lower your credit score by as much as 10 points. If you have excellent credit, applying for a loan will most likely make your score drop by five points or less.
How badly does a personal loan hurt your credit? ›
Does a personal loan hurt your credit score? Your credit score can dip a few points when you formally apply for a personal loan, but missed payments can cause a more significant drop. Getting a personal loan will also increase the amount of debt you owe, which is one of the factors that make up your credit score.
How many points does a personal loan inquiry affect credit score? ›
How do hard inquiries impact your credit score? A hard credit inquiry could lower your credit score by as much as 10 points, though in many cases, the damage probably won't be that significant. As FICO explains, “For most people, one additional credit inquiry will take less than five points off their FICO Scores.”
Will a personal loan build credit score? ›
Though they're a form of debt, personal loans can also serve as a tool to build credit. This is because they can contribute to your payment history and credit mix, as well as lower your credit utilization ratio. Collectively, these three factors account for 75 percent of your credit score.
Is taking out a personal loan bad? ›
If you're not careful, it can be tempting to rack up more debt rather than focusing solely on paying it off. Why this matters: Although taking out a personal loan can help you consolidate high-interest debt, it can cause you to go deeper into debt if you don't address any bad spending habits.
What credit score do you need to get a $30,000 loan? ›
In general, lenders extend $30,000 loans to borrowers with good to excellent credit, which is typically 670 and higher. But there may be lenders who lend to borrowers with bad credit. If you're having difficulty qualifying, you may consider getting a cosigner or co-borrower to help you get approved for the loan.
Does a personal loan look good on your credit? ›
A personal loan can be both helpful and harmful to your credit score, depending on your current credit score and repayment habits. While your score will temporarily drop a few points once you apply and will raise your debt levels, a loan can help your score grow significantly over time.
Does paying off a loan early hurt credit? ›
In most cases, you can pay off a personal loan early. Your credit score might drop, but it will typically be minor and temporary. Paying off an installment loan entirely can affect your credit score because of factors like your total debt, credit mix and payment history.
Can you pay off a personal loan early? ›
It is possible to pay off your personal loan early, but you may not want to. Making an extra payment each month or putting some, or all, of a cash windfall, toward your loans, could help you shave a few months off your repayment period.
What loan does not affect credit score? ›
Buy now, pay later (BNPL).
Buy now, pay later services allow you to make a purchase and repay it over time. Typically, the loan is paid off in four interest-free installments. Some BNPL lenders don't require a credit check, while others may perform a soft inquiry that doesn't affect your score.
Personal loans generally aren't taxable because the money you receive isn't income. Unlike wages or investment earnings, which you earn and keep, you need to repay what you borrow. As a result: You don't report the money you borrow.
Is a loan better than credit card debt? ›
As of November 2023, the average interest rate on a personal loan with a 24-month term was 12.35%, according to data from the Federal Reserve. So, by using a personal loan to pay off your credit card debt, there could be significant savings, as the average credit card rate is currently 21.47%.
Can I get a personal loan without affecting my credit score? ›
It is possible to pre-qualify for a personal loan without hurting your credit score. Do some research before you apply. Read reviews and learn what to consider before agreeing to take on a loan.
Do personal loans go to your bank account? ›
When you take out a personal loan, the cash is usually sent to your checking account. If you're using a loan for debt consolidation, however, some lenders will send the funds directly to your creditors.
What is the best loan to build credit? ›
Compare the Best Credit Builder Loans
| Loan | APR Range | Loan Terms |
|---|
| Credit Strong Best for Long Repayment Terms | 6.99%–15.61% | 2–5 years |
| Digital Federal Credit Union Best Credit Union | 5.0% | 1–2 years |
| MoneyLion Best for Small Loan Amounts | 5.99%–29.99% | 1 year |
| Self Best for Large Loan Amounts | 14.14%–15.58% | 2 years |
1 more rowKey Takeaways
A financial event that affects your credit normally takes 30 days or less from the close of the current billing cycle to be reflected on your credit report. Financial events on a credit report may include a loan application, missed payment, or bankruptcy.
