How a Personal Loan Affects Your Credit Score
Personal loans don’t always have a negative impact on your credit score — in many cases, they can actually help.
However, whether it will raise or lower your score depends on a few factors. Let’s take a look at how a personal loan can impact your credit score in different ways.
How They Can Help
There are many circumstances in which you might see your credit score increase, including:
● Better Payment History: As long as you’re able to make your payments on time, borrowing money will improve your credit score. This, of course, only applies if you are sure to make your payments on time and in full every month.
● Credit Variety: It also helps to have multiple types of credit. For example, if all of your credit is revolving (e.g. credit cards), then adding a new type of credit can actually boost your credit score.
● Lower Credit Utilization Ratio: Your credit utilization ratio measures how much of your available revolving credit you actually use. Having a higher credit utilization ratio can damage your credit score. Since personal loans are not revolving, they don’t factor into your credit utilization ratio, and if used to pay off revolving debt, can improve your credit score.
How They Can Hurt
There are also a few ways that borrowing money can hurt your credit, including:
● Hard Inquiries: When you submit your application, your lender will do a hard credit check, which will result in a hard inquiry. While these do hurt your score a little bit, keep in mind they are not permanent.
● Late Payments: If you’re unable to make your payments on time, or if you default, your credit score will be significantly impacted.
Ultimately, as long as you’re able to make your payments on time, a personal loan should help you increase your credit score.
Based on a $10,000 loan, excellent credit score with a 14% interest rate on a 1 year term