Do personal loans hurt your credit?
Like any debt, a personal loan can affect your credit scores. Personal loans could hurt your scores if they’re not used responsibly. But a properly managed personal loan could help you improve your credit.
What you’ll learn:
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Applying for a personal loan can temporarily affect your credit scores if it requires a hard credit inquiry.
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How a personal loan affects your credit scores is largely dependent on how you manage the loan.
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A personal loan can positively affect your credit scores if you make consistent, on-time payments.
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A personal loan could also affect your credit mix and total debt, two important credit-scoring factors.
How does a personal loan affect credit scores?
Personal loans affect five factors that make up credit scores:
- Payment history
- Amount owed
- Length of credit history
- New credit
- Credit mix
When will a personal loan hurt your credit?
If your personal loan is reported to one or more of the three major credit bureaus, Experian®, Equifax® and TransUnion®, there are several ways it might cause your credit scores to drop.
1. When you apply for it
As part of the loan application process, lenders typically pull a credit report to review your credit history. This is known as a hard inquiry, and it can temporarily take your credit score down a few points.
But while a single hard inquiry may only have a small impact, submitting multiple hard inquiries in a short time could have a more negative impact on credit scores.
According to the Consumer Financial Protection Bureau (CFPB), “If you apply for a lot of credit over a short period of time, it may appear to lenders that you are dealing with financial setbacks.”
2. If it increases your overall debt
Taking out a personal loan will likely increase your total debt, which may negatively affect your credit scores. But FICO notes that having debt doesn’t necessarily mean you’re a high-risk borrower.
FICO also says total debt doesn’t have as much of an impact on your credit scores as your credit utilization ratio does. But personal loans are typically a form of installment credit, which doesn’t affect credit utilization.
3. If it lowers the age of your credit accounts
Opening a new account for a personal loan may lower the average age of your accounts. This can hurt your credit scores in the short term.
4. If you’re late on or miss a payment
Missing or late payments affect payment history, which is typically the most important scoring factor in credit scoring. Missing your payment by one day probably won’t affect your credit scores. Lenders generally only report late payments when a statement balance has gone unpaid for 30 days or more.
According to FICO, after that the exact impact varies depending on how late the payment is and the borrower’s starting credit profile. But scores will likely decrease. What’s more, late credit card payments could show up on your credit reports for up to seven years.
According to credit scorer FICO®, late payments are assessed based on the following criteria:
- How often late payments occur
- How recent the late payment is
- How extreme the late payment is
How can a personal loan help your credit scores?
Managing a personal loan responsibly could positively affect these factors that influence credit scores:
It can help build a positive payment history
Making on-time payments every month on your personal loan can help you build a positive payment history.
It can diversify your credit mix
A credit card account is an example of revolving credit, meaning it can be used and paid down repeatedly. Adding an installment loan, such as a personal loan, could diversify your credit mix. Having a diverse credit mix shows that you can handle a variety of different credit accounts.
Taking out a loan still means taking on more debt, though. And a good credit mix likely won’t help your credit scores if you can’t keep up with your payments.
Personal loans and credit FAQ
Here are more commonly asked questions about personal loans and credit scores.
Is a personal loan bad for your credit scores?
Applying for a personal loan can temporarily lower your credit scores by a few points. But the overall effect of the loan on your credit scores largely depends on how you manage the loan. If you make consistent, on-time payments, for example, getting a personal loan could help you improve your credit scores over time.
What credit scores do you need for a personal loan?
Generally, having higher scores helps make it easier to get approved for a personal loan with better terms and interest rates. The credit score you need for a personal loan varies by lender.
How much will my credit scores go down if I apply for a personal loan?
FICO says that a hard inquiry typically takes five or fewer points off its credit scores.
Key takeaways: Do personal loans hurt your credit?
Applying for a personal loan can temporarily lower your credit scores by a few points. But the overall effect of the loan on your credit scores largely depends on how you manage the loan. If you make consistent, on-time payments, for example, getting a personal loan could help you improve your credit scores over time.
One way to monitor your credit is with CreditWise from Capital One. You can access your credit report and credit score anytime without hurting your credit scores. CreditWise is free, even if you’re not a Capital One cardholder. And signing up gives you access to the CreditWise Simulator.
You can also check your credit reports from each of the three major credit bureaus by visiting AnnualCreditReport.com.
