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
Hard credit check
Hard credit checks temporarily lower your credit score by as much as 10 points. But if you have excellent credit, applying for a loan will most likely make your score drop by five points or less.
How badly does a personal loan hurt your credit? ›
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.
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.”
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.
Does paying off a loan early hurt credit? ›
In most cases, you can pay off a personal loan early. Your credit score might drop, but it will typically be minor and temporary. Paying off an installment loan entirely can affect your credit score because of factors like your total debt, credit mix and payment history.
Does getting approved for a loan hurt credit? ›
Yes, applying for a loan initially hurts your credit, though only by a small amount. That's because you undergo a credit inquiry as part of the application process.
What is one huge disadvantage of a personal loan? ›
Fees and penalties can be high
Personal loans may come with fees and penalties that can drive up the cost of borrowing. Some loans come with origination fees of 1 percent to 6 percent of the loan amount.
What credit score do you need to get a $30,000 loan? ›
Requirements to receive a personal loan
This allows them to look at your history from the past seven years and see whether you've typically made payments on time. For a $30,000 loan, you'll typically need a credit score above 600 just to qualify or above 700 to get a competitive rate.
Do personal loans affect your taxes? ›
Personal loans aren't considered income, so you usually don't pay taxes on them. While a personal loan provides you with a lump sum of money that you can spend like income, you must repay it, which makes it a liability rather than taxable income.
How long do personal loans stay on your credit? ›
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.
Making a Late Payment
Every late payment shows up on your credit score and having a history of late payments combined with closed accounts will negatively impact your credit for quite some time. All you have to do to break this habit is make your payments on time.
Does a personal loan go into your bank account? ›
When you take out a personal loan, the cash is usually sent to your checking account. If you're using a loan for debt consolidation, however, some lenders will send the funds directly to your creditors.
Will my credit score drop if I get a personal loan? ›
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.
Can I get a personal loan without affecting my credit score? ›
Another convenient way to shop for personal loan offers and rates is to use prequalification, a process that uses a soft inquiry, which does not affect credit scores, to estimate the interest rate and loan amount you can expect in a loan offer.
What is the minimum credit score 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.
Do personal loans fall off credit report? ›
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.
Do personal loans look bad when buying a house? ›
A personal loan could have a negative impact on your mortgage application if the loan payments are high in relation to your income. A lender may worry that you don't have enough wiggle room to cover your current expenses and debts, plus a mortgage payment. A personal loan also impacts your credit score.
Does a private loan show on a credit report? ›
In general, hard money lenders and private lenders do not report to the credit bureaus. Any organization, like banks and lenders, wishing to report customers' payment records to the bureaus has to pay each bureau for the reporting.
How low can your credit score be to get a personal loan? ›
Payment history is weighed the most heavily in determining your credit score, along with your total outstanding debt. Generally, borrowers need a credit score of at least 610 to 640 to even qualify for a personal loan. To qualify for a lender's lowest interest rate, borrowers typically need a score of at least 800.
