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How Does a Personal Loan Affect Your Credit Score?

A personal loan can both help and hurt your credit. The key is understanding why — and by how much — your score will be impacted.

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By Devon Delfino

Written by

Devon Delfino

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Devon Delfino is a personal finance writer with over eight years of experience. Her work has been published by U.S. News & World Report, CNN, and The Motley Fool.

Edited by Jared Hughes

Written by

Jared Hughes

Former editor, Fox Money

Jared Hughes has over eight years of experience in personal finance. He has provided insight to Fox Business, New York Post, and NewsBreak.

Reviewed by Meredith Mangan

Written by

Meredith Mangan

Senior editor, Credible

Meredith Mangan is a senior editor at Credible and expert on personal loans.

Updated September 27, 2024

Editorial disclosure: Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as “Credible.”

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Personal loans can either help or hurt your credit, depending on a variety of factors. A personal loan can help you build credit in the long run if you manage your debt responsibly, and can even lower your credit utilization ratio, in the case of debt consolidation. 

But things like a new inquiry on your report — or, more crucially, things like missed payments — can bring your score down. Knowing how a personal loan impacts your score can help you determine if one is right for you.

How a personal loan can help your credit score

  • Establishes payment history: If you’ve never taken out a loan before, or don’t have a credit history, a personal loan can help establish your payment history. Payment history makes up 35% of your FICO score, a common credit scoring model, so making your loan payments on time is crucial.
  • Can help lower credit utilization: The amount of money you owe is another important factor, accounting for 30% of your FICO score — but it’s actually your credit utilization ratio that has the biggest impact here. So, if you were to use personal loan funds to pay off revolving credit, you could also boost your score by lowering your credit utilization ratio.
  • Improves your credit mix: The types of credit accounts in your profile, such as installment loans (like personal loans) or credit cards, are also considered in your score. In general, lenders want to see that you can manage several types of credit. This makes up 10% of your credit score.

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How a personal loan can hurt your credit score

  • Increases your debt: Taking on debt can bring down your score since, again, it would increase your total amount owed. This can affect your debt-to-income ratio (DTI), which lenders also use to determine whether to lend to you. Your DTI is the amount you pay monthly toward your debt, divided by your pretax monthly income. In general, it’s best to have a DTI below 35%.
  • Adds a new credit inquiry: When you send in an application for a personal loan, it triggers a hard credit inquiry, which is added to your credit profile. While this will typically have only a small impact on your credit, the number of inquiries over the last 12 months is also counted. In general, you want this number to be as small as possible. Inquiries typically stay on your credit report for two years.

“It’s also critical to know you’ll be able to make payments before taking out a personal loan. Your score can easily deteriorate if you find you can’t make those payments on time or you begin to lag behind,” said Christian Simmons, a certified educator in personal finance. “A credit score can seem like an abstract or unimportant concept to some people, but having a good one can put you ahead in a number of financial situations — while having a poor one can significantly set you back.”

What credit score is needed for a personal loan?

Lenders generally want to see that you can meet certain requirements, such as a certain minimum credit score, to approve your application. 

Lenders typically want to see a “good” FICO score of 670 or higher, though minimums among lenders vary.

Here’s how FICO breaks down credit score ranges:

  • Under 580: Poor
  • 580 to 669: Fair
  • 670 to 739: Good
  • 740 to 799: Very Good
  • 800 or higher: Exceptional

How to get a personal loan

Here are the steps to take out a personal loan:

  • Determine your loan needs: You’ll first need to know exactly how much you need to borrow and how you plan to use it. You should also know the features you require from a lender, such as online payments and discount opportunities. 
  • Gather documentation: Typically, you’ll need to provide documentation such as pay stubs or bank statements, as well as proof of residence (like a utility bill) and a form of ID. Having those ready will streamline the application process.
  • Shop around: You can start comparing lenders that meet your criteria. Consider factors such as loan amounts, time to fund, and repayment terms.
  • Get prequalified: Prequalification checks to see if you’re likely to qualify with a given lender, and if so, what your terms might look like — without hurting your credit. You should keep in mind, however, that prequalification does not show the exact rates or terms you’d receive if you formally applied to the loan. So there’s some room for error, though it’s still a helpful tool.
  • Pick a lender: Consider the potential costs associated with each lender, such as the annual percentage rate (APR), which includes the interest rate and fees. But you should also check if the lender provides any of those extra features you pinpointed in your wish list. A loan calculator can come in handy here, since it can compare the potential costs associated with each lender.
  • Send in your application: Follow the instructions supplied by the lender, including supplying any additional materials it may request. At this point, the lender will conduct a hard credit inquiry, which can lower your score slightly for about a year. The amount of time it will take to complete the application and get approved depends on the lender. Some lenders can fund your loan as soon as the same or next business day.
  • Sign for the loan: Once approved, you can sign your loan documents, get your funds, and start making payments.

Learn More: How To Get a Personal Loan

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Meet the expert:
Devon Delfino

Devon Delfino is a personal finance writer with over eight years of experience. Her work has been published by U.S. News & World Report, CNN, and The Motley Fool.