How Does a Personal Loan Affect Your Credit Score?

A personal loan can build your credit scores in the long term as long as you consistently repay the debt on time.
Narottam Medhora
By Narottam Medhora 
Updated
Edited by Kim Lowe

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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 is how getting a personal loan can impact your credit score at each step of the process.  

Shopping for a personal loan

Most online 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’re just comparing rates, opt for lenders that offer the soft check.

See if you pre-qualify for a personal loan – without affecting your credit score
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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. New credit applications account for 10% of your credit score.

A hard inquiry typically stays on your credit report for two years but only affects your score the first year.

Repaying your personal loan

Both FICO and VantageScore, two different credit scoring models, consider payment history the most important factor in calculating credit scores, making up 35% to 40% of your score. 

Most online lenders report repayment activity to one or all 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 will not affect your credit, but payments toward your personal loan that are more than 30 days late may be reported 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.

Consolidating your debt

Consolidating debts 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 — accounts for 30% of your overall credit score. Debt consolidation can simplify your finances and help lower your monthly payments so you can pay off the debt sooner.

Frequently asked questions

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. On-time payments toward your personal loan, however, help build your credit.

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.

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