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Do Personal Loans Affect Credit Score?

Your credit score is a crucial three-digit number that acts as a snapshot of your creditworthiness. It's a fundamental aspect of your financial life, as it determines your ability to obtain credit cards, loans, mortgages, and even rental agreements or employment opportunities. Personal loans can significantly impact your credit score, both positively and negatively, depending on how you manage them. It's essential to understand the nuances of how personal loans can influence your credit score to make informed decisions and maintain a strong credit profile.

Couple applying for loan

How Personal Loans Impact Your Credit Score


Credit Inquiries


When you apply for a personal loan, the lender will conduct a hard inquiry on your credit report. This inquiry is recorded on your credit report and can temporarily lower your credit score by a few points. The impact of a single hard inquiry is typically minor and diminishes over time, but multiple hard inquiries within a short period can have a more substantial negative effect.


Credit Utilization


Credit utilization, or the ratio of your total outstanding debt to your total available credit, is a significant factor that contributes to your credit score. Personal loans can affect your credit utilization in two ways:


Installment Loans: Personal loans are typically installment loans, which means you borrow a fixed amount and repay it over a set period with fixed payments. Installment loans don't directly impact your credit utilization ratio, as they don't involve revolving credit limits.


Debt Consolidation: If you use a personal loan to consolidate and pay off revolving debts, such as credit card balances, it can lower your credit utilization ratio. A lower credit utilization ratio can positively impact your credit score, as it demonstrates responsible credit management. However, it's essential to avoid accumulating new revolving debt after consolidation, as this can negate the benefits.


Payment History

  • Your payment history is the most significant factor influencing your credit score, accounting for 35% of your FICO score calculation. Making timely payments on your personal loan can help improve your credit score by demonstrating your creditworthiness and responsible borrowing behavior. On the other hand, missed or late payments can significantly damage your credit score and remain on your credit report for up to seven years, making it more difficult and expensive to obtain credit in the future.

Credit Mix

  • Your credit mix, or the variety of credit types you have (e.g., revolving credit, installment loans, mortgages), accounts for 10% of your FICO score calculation. Having a mix of different credit types can positively impact your credit score by showing that you can responsibly manage various types of credit. Personal loans can contribute to a diversified credit mix, which can be beneficial if you don't have other installment loans on your credit report.

Length of Credit History

  • The length of your credit history accounts for 15% of your FICO score calculation. Personal loans can help extend your credit history, which can benefit your score over time, especially if you make timely payments. A longer credit history demonstrates your experience in managing credit responsibly.

New Credit

  • Opening a new personal loan can temporarily lower your credit score due to the hard inquiry and the addition of a new account. However, the impact of this factor is relatively minor (accounting for 10% of your FICO score) and diminishes over time as you establish a positive payment history with the new loan.

Responsible Use of Personal Loans


To ensure that personal loans have a positive impact on your credit score, it's crucial to use them responsibly. Here are some tips for managing personal loans effectively:

  1. Shop around for the best rates and terms: Compare offers from multiple lenders to find the most favorable interest rates and repayment terms that fit your budget. Using online tools or working with a reputable lender marketplace can help you quickly compare options and find the best deal.
  2. Borrow only what you need: Avoid taking out larger loans than necessary, as this can increase your debt burden and make it more challenging to repay. Carefully calculate your expenses and borrowing needs to determine the appropriate loan amount.
  3. Make timely payments: Set up automatic payments or reminders to ensure that you never miss a payment. Late or missed payments can severely damage your credit score and remain on your credit report for years.
  4. Avoid frequent loan applications: Applying for multiple personal loans within a short period can result in multiple hard inquiries on your credit report, which can temporarily lower your credit score. Space out your loan applications if possible.
  5. Monitor your credit report: Regularly review your credit report to ensure that all information is accurate and up-to-date. Dispute any errors or inaccuracies that could negatively impact your credit score.
  6. Consider a co-signer: If you have a limited credit history or a low credit score, applying for a personal loan with a co-signer who has a strong credit profile can increase your chances of approval and potentially secure better terms.
  7. Avoid prepayment penalties: Some personal loans may have prepayment penalties if you pay off the loan early. Choose a lender that doesn't charge these fees, as paying off the loan early can help improve your credit utilization and credit mix.
  8. Maintain a budget: Create a budget and stick to it to ensure that you have enough funds to make your personal loan payments on time, in addition to your other financial obligations.

While personal loans can affect your credit score, responsible borrowing and repayment habits can help you maintain a strong credit profile. By understanding how personal loans impact your credit score and following best practices, you can leverage these loans to build or improve your creditworthiness over time, ultimately expanding your financial opportunities and saving you money in the long run.


The information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions.

Personal Loans Guide

Personal loans, a popular financial tool, offer individuals access to funds with or without collateral. These loans, provided by banks or online lenders, cater to diverse needs like debt consolidation, home improvements, or unexpected expenses and do not require any collateral. Borrowers receive a lump sum and repay in fixed monthly installments over a specified term, typically ranging from one to seven years. Interest rates, based on creditworthiness, can be fixed or variable, impacting the total repayment amount. While they provide financial flexibility, understanding terms, fees, and the impact on credit is crucial for responsible borrowing and effective financial management.

Guide to Interest Rates in Personal Loans

When you take out a personal loan, one of the most important factors to consider is the interest rate. The interest rate determines how much you'll end up paying over the lifetime of the loan in addition to the principal amount you borrowed. A higher interest rate means you'll pay more in interest charges, while a lower rate will reduce the overall cost of the loan. Understanding interest rates and how they work is crucial for making an informed decision when obtaining a personal loan.

Is It Better to Get a Loan Online or In Person?

When you need to borrow money for major expenses like a home, car, debt consolidation, or emergency costs, you essentially have two main options: apply for a loan online or go through the traditional route of an in-person application at a bank branch. Both alternatives have their own set of pros and cons to weigh carefully.