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
A personal loan can build your credit scores in the long term as long as you consistently repay the debt on time. Narottam is a former personal loans and small business writer for NerdWallet.
How does credit score affect loan? ›
A good credit score can increase your chances of approval and help you qualify for lower interest rates. Lenders also consider your income, employment, and current debts when evaluating your loan application.
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.”
How does your credit score impact the personal loan options you have available on Quizlet? ›
How does your credit score impact the personal loan options you have available? Borrowers with good to excellent credit (690 and above) will be offered lower interest rates and have the widest options when it comes to shopping for personal loans because they appear more trustworthly.
What is the credit score for a personal loan? ›
What is the minimum Credit score required for availing a personal loan? The minimum credit score depends on the lender from whom you avail of the loan. Usually, for a personal loan credit score of 750 and above while some lenders do offer loans at a score of 650 too.
What happens to credit score when you take a loan? ›
A slight dip in your score after applying is generally to be expected since a lender will run a hard inquiry on your credit. But using a personal loan to diversify your credit mix and making on time payments toward your balance can have a positive impact on your score.
How much does a personal loan affect credit score? ›
Lenders will run a hard credit pull whenever you apply for a loan. A hard inquiry will temporarily drop your score by as much as 10 points. However, your score should go up again in the following months after you start making payments.
Will my credit score drop if I get a personal loan? ›
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 long do personal loans stay on a credit report? ›
In most cases, personal loans will stay on your credit report for around 10 years. But the type of inquiry can impact how long those marks actually remain on your credit report.
Which of the following factors has the greatest impact on a borrower's credit score? ›
One of the most critical drivers of your credit score is your payment history. This includes any payments you have made on credit cards, loans, and other debts. Late payments, missed payments, and loan defaults can negatively impact your credit score.
Your payment history carries the most weight in factors that affect your credit score, because it reveals whether you have a history of repaying funds that are loaned to you.
Which three pieces of information contribute the most to your credit score? ›
FICO Scores are calculated using many different pieces of credit data in your credit report. This data is grouped into five categories: payment history (35%), amounts owed (30%), length of credit history (15%), new credit (10%) and credit mix (10%).
What credit score do you need to get a $20,000 loan? ›
Requirements for a $20,000 Personal Loan
This means they'll want to see your credit score, income level and DTI ratio. Requirements vary by lender, but most lenders require borrowers to have a credit score in the good to excellent range — meaning a score of at least 670.
What credit score is needed for a 1000 personal loan? ›
Most lenders require a minimum credit score of 640 – 650. However, some borrowers may be able to qualify for a higher interest rate personal loan with a lower score. To get a better interest rate, you'll probably need a FICO® Score of 670 or higher.
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.
How much does your credit score go down when you get a loan? ›
Hard inquiry
Lenders will run a hard credit pull whenever you apply for a loan. A hard inquiry will temporarily drop your score by as much as 10 points.
Does credit score affect loan approval? ›
Loan Eligibility and Interest Rates
Credit scores directly impact your loan eligibility and the interest rates you are offered. Lenders typically have specific credit score requirements, and borrowers with higher credit scores are more likely to meet those criteria.
Does your credit score affect how much you can borrow? ›
If your credit score doesn't meet the lender's threshold, that means they will not offer borrowing to you. Even if you do not meet the lender's threshold, that does not necessarily mean you have a bad credit score some lenders set their credit score bar quite high.
How much does credit score affect borrowing power? ›
If you have an 'excellent' credit score, a lender is more likely to approve you for a loan, give you a lower interest rate, and have more favourable lending conditions.
