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.
A personal loan can affect your credit score when:
- You shop for a personal loan.
- You apply for a personal loan.
- You regularly repay your personal loan.
- You miss a personal loan repayment.
- You consolidate your debt.
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 it allows you to shop around for the best rates and terms.
NerdWallet’s personal loan marketplace lets you compare multiple lenders with one pre-qualification.
Some lenders, including many 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.
» MORE: Personal loans for good credit
Applying for a personal loan
A personal loan application triggers a hard credit check that can temporarily lower your credit scores.
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 off less than five points from your FICO credit score. Overall, new credit applications account for about 10% of your credit scores.
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, which are two different credit scoring models, consider payment history as the most important factor in calculating credit scores, making up 35% of your score. Developing a record of consistent, on-time payments toward your debt helps build credit in the long term.
Developing a history of on-time payments helps build credit in the long-term.
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.
A 30-day delinquency could lower an excellent score by 90 to 110 points.
For example, for someone with a FICO credit score of 780, a 30-day delinquency could lower the score by 90 to 110 points, a drop from excellent to fair credit.
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 scores.
Personal loans also help improve your credit mix. It adds installment credit to your report, a different form of credit than the revolving credit associated with credit cards.