How Personal Loans Affect Your Credit Score (2024)

A personal loan can affect your credit score in a number of ways⁠—both good and bad. Taking out a personal loan isn't bad for your credit score in and of itself. However, it may affect your overall score for the short term and make it more difficult for you to obtain additional credit before that new loan is paid back.

On the other hand, paying off a personal loan in a timely manner should boost your overall score. If you decide to take one out, be sure to research and compare all of your options thoroughly in order to qualify for the best possible loan.

Key Takeaways

  • Your overall credit rating could be lowered temporarily when you take a personal loan because you have acquired additional debt.
  • In the short term, you also may not be able to get another loan or open another credit card.
  • However, repaying the loan on time will not only bring your credit score back up, but it can also help build it over time.

How Applying for Loans Affects Your Credit Score

Your credit score is calculated based on five factors: payment history, amounts owed, length of credit history, new credit, and credit mix. The exact percentages vary among the three major credit rating agencies, but according to FICO, 10% is based on any new debt or newly opened lines of credit, and another 10% is based on credit mix—the number of credit lines that you have open (including secured credit cards). As such, obtaining a new personal loan could affect your credit rating. Your outstanding debt total has now increased, and you have acquired new debt.

Credit agencies also take note of new financial activity. If, for example, you tried to apply for an auto loan shortly after taking out a personal loan, your application might be rejected on the basis that you already have as much debt as you can handle.

Your overall credit history has more impact on your credit score than a single new loan. If you have a long history of managing debt and making timely payments, the impact on your credit score from taking out a new loan is likely to be lessened. The easiest and best way to keep a personal loan from lowering your credit score is to make your payments on time and within the terms of the loan agreement.

The three major credit reporting bureaus in the United States that lenders turn to—Equifax, Experian, and TransUnion—provide similar scores on your creditworthiness, but there can be small differences.

How Do People Use Personal Loans?

Investopedia commissioned a national survey of 962 U.S. adults between Aug. 14, 2023, to Sept. 15, 2023, who had taken out a personal loan to learn how they used their loan proceeds and how they might use future personal loans. Debt consolidation was the most common reason people borrowed money, followed by home improvement and other large expenditures.

How a Personal Loan Can Boost Your Credit Score

A personal loan that you repay in a timely fashion can have a positive effect on your credit score, as it demonstrates that you can handle debt responsibly.

Unfortunately, those who are the most averse to taking on debt could have lousy credit scores. After all, a person who never acquires debt and pays it off in installments has no payment history.

You can receive a free copy of your credit reports from the three credit bureaus every 12 months, which you can obtain by visiting www.annualcreditreport.com.

What Credit Score Is Needed for a Personal Loan?

FICO scores fall into five categories—poor, fair, good, very good, and exceptional. Here's a breakdown of the ranges:

  • Poor (<580): Below average, and lenders will consider you a risky borrower.
  • Fair (580–669): Below average, but many lenders may still approve loans with this score.
  • Good (670–739): Near or slightly above average, and most lenders view this as a good score.
  • Very Good (740–799): Above average and shows lenders that you are a very dependable borrower.
  • Exceptional (800+): Well above average, and lenders will view you as an exceptional borrower.

The higher your credit score, the more likely a lender is to approve your loan application and offer more favorable terms, such as a lower interest rate. While each has its own criteria, in general, lenders view scores above 670 as an indication that a borrower is creditworthy.

Also keep in mind that while your credit score plays a crucial role in helping you qualify for a personal loan, lenders also consider other factors like the amount of incomeyou earn, how much money you have in the bank, and how long you have been employed.

Finding the right loan can be particularly stressful when you face a financial emergency and need to borrow money in a hurry. If you have the additional obstacle of bad credit, accessing cash quickly may seem even more daunting. Fortunately, you may still be able to secure an emergency loan even when you have credit problems.

What Can I Use a Personal Loan For?

Money acquired from a personal loan can be used for a variety of things. Some examples include using it to pay your tax debts, finance home renovations, or cover an unexpected medical emergency.

What Rate Will I Get for a Personal Loan?

Your loan rate will depend on your credit score and credit history. The higher your score and the better the history, the lower your interest rate and monthly payments will be. The average rate for a 24-month personal loan was 12.17% in Aug. 2023.

Does Taking Out a Personal Loan Hurt my Credit Score?

Your credit score will take a slight hit when you apply for a loan, as the lender takes a hard look at your credit. However, if you make your payments on time, your credit score should improve.

How Personal Loans Affect Your Credit Score (1)

The Bottom Line

A personal loan will cause a slight hit to your credit score in the short term, but making on-time payments will bring it back up and can help improve your credit in the long run. A personal loan calculator can be a big help when it comes to determining the loan repayment term that's right for you.

Your credit score will be hurt if you pay late or default on the loan. And don't forget that a personal loan may also reduce your borrowing power for other lines of credit.If you've recently taken out a personal loan and accidentally made multiple late payments or defaulted on said loan, one of the best credit repair companies might be able to help remove the negative marks on your credit report.

How Personal Loans Affect Your Credit Score (2024)

FAQs

How Personal Loans Affect Your Credit Score? ›

Personal loans can boost your credit score by adding to your credit mix, improving your credit utilization and your payment history. Applying for a personal loan can hurt your credit score temporarily by adding to your current debt, and missing payments can lower it further.

How do personal loans affect credit score? ›

A personal loan will cause a slight hit to your credit score in the short term, but making on-time payments will bring it back up and can help improve your credit in the long run. A personal loan calculator can be a big help when it comes to determining the loan repayment term that's right for you.

How does your credit score affect getting a loan? ›

When you apply for a loan, reputable lenders will check your credit. The higher your score, the more likely you are to get approved, and the lower your interest rate will be. If you have a score less than good (under 670), you likely won't get approved by most lenders.

Does trying to get a loan affect your credit score? ›

It adds a hard search to your credit report

It can make a dent in your credit score, which should be short-term as long as you pay it back in line with the agreement. But, if you're also looking for other types of credit (like a credit card or car finance , for example), you might find it's harder to get accepted.

Does a personal line of credit affect your credit score? ›

Like credit cards, a line of credit is considered revolving debt and treated similarly when generating your credit score—if you make your payments in full and on time, it will reflect positively in your credit score.

How long will personal loan affect credit score? ›

A personal loan can stay on your credit report anywhere from a few years to up to a decade, depending on how you managed your debt. Missed payments may remain on your report for seven years, while bankruptcies and closed accounts that you've paid in full could stay on your report for a decade.

What affects your credit score the most? ›

Your payment history is one of the most important credit scoring factors and can have the biggest impact on your scores. Having a long history of on-time payments is best for your credit scores, while missing a payment could hurt them. The effects of missing payments can also increase the longer a bill goes unpaid.

What are the 5 factors that affect your credit score? ›

Credit 101: What Are the 5 Factors That Affect Your Credit Score?
  • Your payment history (35 percent) ...
  • Amounts owed (30 percent) ...
  • Length of your credit history (15 percent) ...
  • Your credit mix (10 percent) ...
  • Any new credit (10 percent)

What credit score is needed for a personal loan? ›

Many give preference to borrowers with good or excellent credit scores (690 and above), but some lenders accept borrowers with bad credit (a score below 630). The typical minimum credit score to qualify for a personal loan is 560 to 660, according to lenders surveyed by NerdWallet.

What loan does not affect credit score? ›

Summary of no-credit-check lenders
LenderLoan typeLoan amount
OppLoansHigh-interest installment loan.$500 to $4,000.
Possible FinanceHigh-interest installment loan.Up to $500.
EarninCash advance app.Up to $100 per day; up to $750 per pay period.
AfterpayBuy now, pay later app.$200 to $2,000.
Jan 10, 2024

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.

Will paying off a personal loan increase my credit score? ›

Generally, the longer your credit history, the better your credit score will be. Therefore, if you pay off a personal loan early, you could bring down your average credit history length and your credit score.

Is a personal loan good for credit card debt? ›

Personal loans can be a great way to consolidate credit card debt and get a lower interest rate. Credit card debt can quickly turn into a cycle of never-ending payments. Thankfully, there are several solutions if you're looking to get ahead of your debt and pay it off faster.

What are 3 C's of credit? ›

Students classify those characteristics based on the three C's of credit (capacity, character, and collateral), assess the riskiness of lending to that individual based on these characteristics, and then decide whether or not to approve or deny the loan request.

Are personal loans hard to get? ›

Personal loans generally aren't hard to get and are available from credit unions, banks, and online lenders. There are various types of personal loans to consider, depending on how much money you need to borrow.

What is a good credit score? ›

A good credit score is generally 690 to 719 on the 300-850 scale commonly used for FICO scores and VantageScores. Amanda Barroso is a personal finance writer who joined NerdWallet in 2021, covering credit scoring.

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 it bad to pay off a personal loan early? ›

Paying off personal loan debt early has a few downsides: Namely, you may have less cash on hand in the short term. "If savings are used to pay off the loan, it may create a shortage in the borrower's emergency-use fund," Nitzsche says.

Can I get a personal loan without affecting my credit score? ›

Pre-qualifying for a personal loan shows your likelihood of approval without affecting your credit score. You can get pre-qualified offers from multiple lenders to compare rates and terms. Use pre-qualified offers to determine whether the monthly loan payments will fit your budget.

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