How Does a Personal Loan Affect My Credit Score?

A personal loan provides a lump sum of money that is repaid over a set period through fixed monthly installments. These loans are typically unsecured, meaning they do not require collateral, and can be used for various purposes like consolidating debt or financing significant purchases. A credit score is a numerical representation of an individual’s creditworthiness, summarizing their financial reliability based on their credit history. This article explores the ways a personal loan interacts with and influences an individual’s credit score throughout its lifecycle.

Impact During Application and Origination

Applying for a personal loan can immediately, though temporarily, affect a credit score. Lenders perform a “hard inquiry” on an applicant’s credit report to assess creditworthiness. This action is recorded and can cause a small, temporary dip in the credit score, usually by a few points. A hard inquiry remains on a credit report for up to two years, but its impact diminishes after 12 months.

Once approved, the new personal loan account appears on the credit report, having an initial, short-term effect. Adding a new account, like an installment loan, can temporarily lower the average age of all credit accounts. This factor, “length of credit history,” contributes to credit score calculations, and a shorter average age can slightly reduce the score. However, these initial effects are minor and short-lived if the loan is managed responsibly.

Impact of Repayment Behavior

The most substantial influence a personal loan has on a credit score stems from repayment behavior. Payment history is the single most heavily weighted factor in credit score calculations, accounting for approximately 35% of a FICO Score and 41% of a VantageScore. Consistently making full, on-time payments demonstrates financial responsibility and can significantly improve a credit score over the loan term. This positive track record indicates a borrower’s likelihood of fulfilling future obligations.

Conversely, late payments, missed payments, or defaulting on the loan can have severe negative consequences for a credit score. A payment reported 30 days or more past due can cause a significant drop in score, with the negative impact increasing with longer delinquencies, such as 60 or 90 days late. These negative marks remain on a credit report for up to seven years from the original delinquency date, even if the past-due balance is eventually paid. The amount owed on the loan also influences the credit score; as the principal balance decreases with each payment, it is viewed favorably, reducing the overall debt burden and positively impacting the “amounts owed” category.

Influence on Credit Profile Composition

A personal loan also plays a role in shaping the overall composition of a credit profile. Credit scoring models consider “credit mix,” which refers to the variety of different types of credit accounts an individual manages. A personal loan, as an installment loan with fixed payments over a set period, can diversify a credit portfolio that might otherwise consist primarily of revolving credit, such as credit cards. Demonstrating the ability to responsibly manage both installment and revolving accounts can be viewed positively by credit scoring models, contributing to approximately 10% of a FICO Score.

A personal loan contributes to the “length of credit history” factor. While a new loan initially lowers the average age of accounts, as the personal loan account matures and is paid down responsibly, it positively contributes to the overall length and stability of the credit history. A longer history of responsible credit management signals reliability to lenders. Once the loan is fully paid off, the account is typically marked as “closed – paid as agreed” and can remain on the credit report for up to 10 years, continuing to positively influence credit history and payment history.