Do personal loans affect your credit scores?

Borrowers typically turn to personal loans to make a big purchase, consolidate high-interest debt and access cash. If you are considering a personal loan, it’s worth keeping in mind that it could have long-term effects on your credit scores. Keep reading to find out how a personal loan could affect your credit scores.

Key takeaways

• Applying for a personal loan can temporarily impact your credit scores if it requires a hard credit inquiry.
• How a personal loan affects your credit scores is largely dependent on how you manage the loan.
• A personal loan can positively affect your credit scores if you make consistent, on-time payments. 
• A personal loan could also affect your credit mix and total debt, two important credit-scoring factors.

A loan application typically results in a hard inquiry. This happens when a lender looks at your credit report as part of a review of your application. A hard inquiry can stay on your credit report for up to two years, but it may only have a negative effect on your credit scores for a year.

Having too many inquiries on your credit report—especially within a short period of time—may also have an impact, the Consumer Financial Protection Bureau (CFPB) says. And if your credit report shows multiple credit applications within a short period of time, it might appear to lenders that your finances have changed negatively.

Checking your credit reports and scores can give you a better idea of whether you’ll be approved for a loan. And checking your credit doesn’t hurt your credit scores since it’s considered a soft inquiry. Generally, the better your credit scores, the more likely you are to be approved for a line of credit. 

You could also consider going through a pre-qualification process. If it’s an option, seeing whether you’re pre-qualified before you apply doesn’t guarantee that your loan application will be successful. But it could give you a hint. And it typically involves a soft inquiry, which has no impact on your credit scores. 

How much your scores are affected can depend on your specific financial situation. For instance, the state of your credit before you take on the personal loan and whether you practice responsible credit habits can determine how much your scores could change.

For a better idea about how opening a personal loan might affect your scores, you could consider using the CreditWise Simulator. To use the Simulator, just sign up for CreditWise from Capital One. It’s free to everyone. And using it won’t affect your credit scores.

Personal loans could be reported to the three major credit bureaus—Experian®, Equifax® and TransUnion®. If yours is, the loan may be considered when your credit scores are calculated. That means that a personal loan could hurt or help your credit scores. 

Here are a few examples of how a personal loan might cause your credit scores to drop:

Your credit history is a factor in calculating your credit scores. And taking on a new personal loan could lower the average age of your credit accounts, so you might see a dip in your credit scores.

It’s important to make payments on time and avoid late payments or missing payments altogether. As the CFPB points out, your payment history plays a part in your credit scores. And the better your payment history, the better your credit scores might be. But if you’re late or miss payments, that could hurt your credit scores.

If your personal loan is reported to credit bureaus, the loan could help your credit scores—with responsible credit habits. So it’s how you handle the loan that can make the difference. 

There are other factors that affect your credit scores. And you’ll need to keep an eye on them all if you want to get and keep good credit scores. With that said, here are a few ways a personal loan might have a positive impact on your credit scores:

Making on-time payments every month could help you build a positive payment history. And according to the CFPB, a good payment history could help you improve your credit scores or maintain good credit scores. 

If you need help keeping up with bill payments, you could set up a budget, automatic payments or reminder alerts.

A personal loan is a type of credit known as an installment loan. With a personal loan, you borrow money and pay it back in equal installments over a fixed period of time. 

A credit card account is an example of revolving credit, meaning it can be used and paid down repeatedly. So if your only source of credit has been from credit cards, the addition of a personal loan would diversify your credit mix. And a diverse credit mix could improve your credit scores.

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.

Your credit utilization ratio is a measure of how much of your available credit you’re using. A personal loan doesn’t directly factor into your credit utilization because it’s a form of installment credit. But using a personal loan to pay off revolving credit debt could lower your credit utilization. 

The CFPB says experts recommend keeping utilization below 30% to improve your credit scores.

To find out what impact your personal loan is having on your credit scores, you can check your credit reports regularly. You can get free credit reports from each of the three major credit bureaus by visiting AnnualCreditReport.com.

And with CreditWise, you can access your free TransUnion credit report and VantageScore® 3.0 credit score anytime, without hurting your scores. CreditWise is free and available to everyone—not just Capital One cardholders. And signing up gives you access to the CreditWise Simulator.