Does a Personal Loan Hurt Your Credit Score?

Many people wonder about a personal loan’s potential influence on their credit score. This concern is understandable, as a credit score plays a significant role in various financial aspects, from securing favorable interest rates on future loans to renting an apartment. The impact a personal loan has on your credit depends on a range of factors. Understanding these dynamics can help you make informed financial decisions.

Credit Score Fundamentals

A credit score provides a snapshot of your creditworthiness, helping lenders assess the risk associated with extending credit. FICO and VantageScore are two widely used models that calculate these scores based on information in your credit reports. Both models consider similar categories of financial behavior, assigning different weights to each.

The most influential factor in both scoring models is your payment history, typically accounting for approximately 35% of a FICO Score and around 40% of a VantageScore. This category reflects whether you consistently make your payments on time across all your credit accounts. Another significant component, usually around 30% for FICO Scores, is the amounts you owe, often referred to as credit utilization for revolving accounts. This measures how much of your available credit you are currently using.

The length of your credit history also contributes to your score, generally making up about 15% of a FICO Score and being combined with credit mix for VantageScore. This factor considers the age of your oldest account, your newest account, and the average age of all your accounts. New credit, representing recent applications and newly opened accounts, accounts for about 10% of a FICO Score. Your credit mix, or the variety of credit types you manage, accounts for approximately 10% of a FICO Score.

Initial Credit Score Changes from a Personal Loan

When you apply for a personal loan, initial steps can temporarily shift your credit score. Lenders conduct a “hard inquiry” or “hard pull” on your credit report to evaluate your history and determine eligibility. This inquiry is recorded and usually causes a small, temporary dip in your score, often by fewer than five points. While a hard inquiry remains on your credit report for up to two years, its effect typically diminishes after about 12 months.

Opening a new personal loan account also influences the “length of credit history” factor. A new account can reduce the average age of all your open credit accounts, which may cause another slight, temporary decrease in your score. Credit scoring models favor longer, established credit histories. This initial impact is minor and recovers with responsible management of the new loan.

A personal loan adds a new debt balance to your credit profile. While installment loan balances do not directly affect your credit utilization ratio like revolving credit, the total amount of debt you owe is still a factor. This new debt increases your overall indebtedness, contributing to the initial score adjustment.

Ongoing Credit Score Dynamics with a Personal Loan

Once you secure a personal loan, managing the account becomes the primary driver of its long-term effect on your credit score. Consistent, on-time payments are the most impactful positive action. Payment history is the most heavily weighted factor in credit scoring models. Each timely payment demonstrates financial reliability, gradually building a positive payment record that can lead to credit score improvement over the loan’s term.

Conversely, late or missed payments can damage your credit score. A payment reported 30 days or more past its due date can significantly lower your score. Such negative information can remain on your credit report for up to seven years, affecting your ability to obtain new credit or favorable terms. Lenders report payment activity to the major credit bureaus—Experian, Equifax, and TransUnion.

A personal loan can also positively influence your credit mix. Having a blend of different credit types, such as revolving credit (like credit cards) and installment credit (like personal loans, mortgages, or auto loans), is viewed favorably by scoring models. This diversification demonstrates your ability to manage various forms of debt responsibly. For VantageScore, credit mix is considered within the “age and type of credit” category, which holds significant weight.

As you make consistent payments and reduce the principal balance of your personal loan, this decrease in your total debt is beneficial. While installment loans do not directly factor into the credit utilization ratio for revolving accounts, reducing overall debt can still positively impact the “amounts owed” category. If a personal loan is used for debt consolidation, especially to pay down high-interest credit card balances, it can significantly lower your revolving credit utilization ratio, which is a factor in credit scoring. This strategic use of a personal loan can lead to a notable improvement in your credit score by freeing up available credit on revolving accounts.