How Does a Personal Loan Affect Your Credit Score?
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How Does a Personal Loan Affect Your Credit Score?
A personal loan can boost your credit scores in the long term as long as you consistently pay back the loan on time.
Last updated on Jul 6, 2021
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There’s no mystery about it: A personal loan can affect your credit score much like any other form of credit. Make on-time payments and build your credit. Late payments could significantly impact your credit score if they’re reported to the credit bureaus.
A personal loan can impact your credit score if you:
You shop for an individual loan.
You can apply for an individual loan.
You regularly repay the personal loan.
You miss an individual loan payment.
You consolidate your debt.
Shopping for an individual loan
Many online lenders permit customers to apply for a personal loan by conducting the use of a soft credit report which is a standard examination of your creditworthiness. Soft inquiries won’t impact your credit score and lets you compare to find the most competitive rates and conditions.
NerdWallet’s marketplace lets you compare several lenders in only one pre-qualification.
Check if you are pre-qualified for a personal loan and it will not affect your credit score
Just answer a few questions to receive personalized rate estimates from multiple lenders.
Certain lenders, such as many banks and credit unions do not provide a soft check with pre-qualification. If you’re just comparing rates, opt for lenders who offer a soft check.
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The process of applying for personal loan
When you apply to get a personal loan will trigger the credit check, which is an in-depth examination of your credit score. The inquiry usually knocks off less than five points from your FICO score. In the end, new credit applications make up about 10 percent of your credit scores.
The hard inquiry is typically on your credit report for two years, but it only affects your credit score the first year.
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Repaying your personal loan
Each of FICO and VantageScore which are two different credit scoring systems, consider payment history as the most significant factor in formulating credit scores. It makes up 35 percent of your score. Developing a record of consistent and timely payments towards your debt can help in the long-term.
Most online lenders report payments to any or all three credit bureaus in the United States that include Equifax, Experian and TransUnion. Working with a lender that is reported to all three bureaus can mean more consistency across the credit report.
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Missing a loan due
A late due date of just a few days won’t affect your creditscore, but payments toward the personal loan that are more than 30 days late may be reported to credit bureaus, leading to significant damage to your score on credit.
For instance, for someone with for instance a FICO credit score of 780or more, a thirty-day delinquency can reduce the score by 90 to 110 points, a change from fair to excellent credit.
Setting up a system that tracks all debt repayments, even your own personal loan will help you avoid late payment.
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Consolidating your debt
to a personal loan can increase your credit score by reducing your credit utilization. The amount of your available credit you use — accounts for 30 percent of your overall credit scores.
Personal loans can also aid in improving your credit score. They can add an installment loan to your credit report which is a different type of credit than the revolving credit offered by credit cards.
About the author: Narottam is a former personal loans and small business writer for
NerdWallet.
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