How much does a personal loan affect your credit score?

A personal loan can help or hurt your credit rating depending on these factors. (iStock)

Outstanding personal loan balances hit a record $305 billion last year, according to a study from credit bureau Experian. The report also found that personal loan debt is growing at a faster rate than auto loan, mortgage, credit card, and student loan debt, with the average balance of a personal loan clocking in at $16,259.

Still, taking out a personal loan can be a smart decision for some consumers, particularly for people who are going to use the money to consolidate high-interest debt at a lower interest rate, make necessary home repairs, or cover an emergency medical bill. Credible can help compare personal loan companies (and, hopefully, land you some of the lowest rates for what you’re looking for).


The caveat: Taking out a personal loan can impact your credit rating in positive or negative ways depending on a number of factors. Here’s a look at how a personal loan can affect your credit score.

1. How personal loans can hurt your credit score

Triggering too many hard inquiries on your credit report

Each time you submit an application for a personal loan, the lender runs what’s called a “hard inquiry” on your credit, which entails an official pull of your credit report—a transcript of your credit history. A hard inquiry can ding your credit score by up to five points. Although a slight hit may not seem like a big deal, filing too many personal loan applications can make a significant dent in your score.

Personal loans increase your debt load

Your debt-to-credit utilization ratio— a measure of how much debt you’ve accumulated divided by the credit limit on the sum of your accounts—comprises 30 percent of your FICO score. Generally, you want to keep your total utilization ratio below 30 percent to maintain a healthy score. But, because taking on more debt through a personal loan increases your debt-to-credit utilization, your score may get damaged in the process.

Missing personal loan payments

Making personal loan payments on time is crucial. Though missing a due date by a few dates won’t usually hurt your score, a 30-day late payment can drop your score up to 110 points if you’ve ever missed a payment on a credit account, according to data from credit analysis firm FICO.


Fair warning: Defaulted personal loans stay on your credit report for seven years. So, you need to be extra diligent about making your loan payments on time.

2. How personal loans can help your credit score

Building a positive credit history

Payment history is the most important factor in calculating your FICO score—it comprises up to 35 percent of your score, according to If you’re consistent about making your personal loan payments every billing cycle, that will help you build positive credit history and raise your score over time. Therefore, it’s important to set a monthly budget—and stick to it—to ensure you have enough cash to pay your personal loan balance in full each month.

Creating a mix of credit

Your score rises if you have a rich combination of different types of credit card accounts, such as credit cards, home mortgages, and personal loans, because credit mix makes up 10 percent of your score.


Reducing your credit utilization

Planning to use a personal loan to pay off revolving credit card debt? Doing so can help lower your “amounts owed,” or your usage of available credit, which makes up 30 percent of your score.

How to apply for a personal loan

Shopping around for a personal loan offer will allow you to find the best offer and walk away with the lowest rate. You can make the process a whole lot easier by visiting Credible, which lets you compare personal loan quotes from multiple lenders in as little as two minutes, with rates starting as low as 4.99% and loans ranging from $1,000 to $100,000. Plus, checking rates through Credible won’t affect your score, and it won’t cost you a penny.


You can also use Credible’s personal loan calculator to estimate how much you’ll pay for a loan and determine how long it will take you to pay it off.

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