31st March 2021
Will a personal loan affect my credit score?
will a personal loan affect my credit score

Like any other form of credit, a personal loan can affect your credit score at different stages of the process. Your score may go up and down throughout the process, but for most people, you’ll end up with a higher credit score than when you started if you make all of your payments on time.

Shopping for a personal loan

When you’re shopping around to check your rate before you apply for a loan, it’s always a good idea to ask the lender what kind of credit checks they are doing. Lenders can do a soft credit pull, rather than a hard inquiry when you provide your information to see what rate you qualify for. This doesn’t get recorded as an official inquiry on your credit report, so it won’t affect your credit score. A hard enquiry can drop your credit score by a few points each time. Some lenders, including many banks and credit unions, don’t offer a soft check with pre-qualification. If you’re just comparing rates, opt for lenders like mal that offer the soft check so your credit score will remain unaffected.

Applying for a Personal Loan

When you go ahead and apply for the loan, the lender will do a more detailed credit check, known as a hard credit pull. This will get recorded on your credit report as a credit inquiry, and can lead to a credit score drop of around 5 points for most people. That’s why it’s a good idea to check your credit score before you apply for a loan, and take any steps to boost a poor credit score. Multiple applications with different lenders, particularly within a short space of time, can negatively impact your credit score. The good news is that these credit inquiries only last a short period of time. After a year they’ll stop negatively affecting your credit score, and after two years they’ll fall off your credit report entirely.

Repaying Your Personal Loan

Developing a record of consistent, on-time payments toward your debt helps build credit in the long term. Payment history is the biggest factor in your credit score, accounting for 30% of the overall score. As you make your payments, you’re most likely to see the biggest boost in your credit score. However, it’s important to make sure your repayments are on time. While missing a due date by a few days will not affect your credit, payments toward your personal loan that are more than 30 days late may be reported, and can damage your credit score. The amount you are overdue and the frequency can also lower your score.

As time passes, these late payments won’t keep your score down quite as much, especially if you make the rest of your payments on time. This is why it’s important to develop good budgeting and saving habits, and to consider putting your personal loan payments on auto-pay. If you are using your personal loan to consolidate debts, this can also help improve your credit rating.

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