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.
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Written by Narottam Medhora
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Edited by Kim Lowe
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Co-written by Nicole Dow

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Nerdy takeaways
  • A personal loan can have both positive and negative influences on your credit score.

  • On-time payments and a diversified credit mix can build your credit.

  • Using a personal loan to consolidate high-interest credit card debt could benefit your score.

  • Missed payments and an increased debt load can lower your credit score.

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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’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.

Comparing options? See if you pre-qualify for a personal loan - without affecting your credit score
Just answer a few questions to get personalized rate estimates from multiple lenders.

on NerdWallet

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

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.

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.

Comparing options? See if you pre-qualify for a personal loan - without affecting your credit score
Just answer a few questions to get personalized rate estimates from multiple lenders.

on NerdWallet

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