How Does a Personal Loan Affect Your Credit Score?

Managing a personal loan well might help improve your credit score. It may lower your credit card balances and add variety to your types of debt. If a personal loan is used to increase your overall debt or if payments are late, however, the additional credit also has the potential to harm your credit score.

Knowing how personal loans may affect your credit score is an important step in making informed decisions about your financial future. We’ve provided an overview that may help you decide if a personal loan is right for you.

Does a personal loan help your credit score? 

A personal loan may have a positive impact on your credit when it helps you manage your debt well. There are several ways that a personal loan may increase your credit score.

A personal loan may help you manage your debt 

With a personal loan you can consolidate your debt and have one set regular monthly payment. This helps you budget for your payments and track your progress. Consistently paying down your debt may positively impact your credit score. Discover® Personal Loans debt consolidation customers in good standing experience a 15+ point increase, on average, in their FICO® Score after three months of responsible payment behavior.* 

A personal loan can lower your credit utilization ratio

Your credit utilization ratio is the percentage of your available revolving credit that you are using. Taking out a personal loan to pay off revolving credit can lower your credit utilization, which might positively affect your credit score. 

A personal loan can diversify your credit mix

Because a personal loan is an unsecured installment loan, it can diversify the types of credit you have. As long as you make your payments on time, having different types of loans may improve your credit score. 

A personal loan can build your history of on-time payments 

With a fixed interest rate and one set regular monthly payment, a personal loan allows you to plan ahead. On-time payments on your personal loan provide a positive payment history on your credit reports, which may improve your credit health. 

Does a personal loan hurt your credit score? 

Depending on your financial situation, it’s possible that adding a personal loan to your borrowings could negatively affect your credit score. Some of these effects may be temporary. Here is what you can expect:

Hard credit pulls

Before offering most loans, including a personal loan, you can expect a lender to closely examine your credit report. This “hard credit pull” process may temporarily lower your credit score. 

Late or missed payments

Any late or missed payments are recorded in your credit history, which tells lenders how well you’ve managed your money over time. This information could harm your credit score, which is why responsible payment is critical.

Increasing your overall debt

A personal loan might increase the amount of your overall debt if you continue borrowing elsewhere. Depending on how much you borrow and your payment history, the higher balance alone might not lower your credit score. But it could increase your debt-to-income ratio, which may affect your creditworthiness.

Lowering your average credit age

Taking out a personal loan can lower the average age of your credit accounts, which may cause a temporary dip in your credit score. 

Does applying for a personal loan affect your credit score?

When you apply for a loan, the lender typically looks closely at your credit report as part of their underwriting and decisioning process. This is called a hard credit pull, and it may temporarily lower your credit score.

Checking to see if you pre-qualify for a loan before you apply usually won’t affect your credit. For example, if you’re considering a personal loan, Discover Personal Loans lets you check your rate with a “soft credit pull.” A soft pull helps you see how much money you might be able to borrow and the interest rate based on your repayment term. Since it’s not attached to an actual application for credit, a soft credit pull won’t impact your credit score at all.

What credit score do you need for a personal loan? 

The exact score you need to get a loan depends on the lender. You might be declined if your score is too low for the lender’s requirements. The higher your credit score, the more likely you are to get approved for a personal loan. Most lenders use a FICO® Score, which is a three-digit number typically ranging between 300 and 850. A good FICO® Score is considered to be 670 or higher. 

How can you check your credit score?

There are three credit reporting agencies, also called credit bureaus or consumer reporting agencies: TransUnion®, Equifax®, and Experian®. You may check your credit report online from each credit bureau once a week for free. To see your credit creport, you can request a free copy of your three credit reports from AnnualCreditReport.com. In most cases, your free annual credit report from AnnualCreditReport.com does not include your credit score, or you need to pay a fee for the credit score. Checking your own credit reports will not impact your credit score.

Is a persoal loan right for you? 

Whether you want to consolidate debt, cover unexpected medical bills, or take a dream vacation, a personal loan offers the financial flexibility to pay for a range of expenses.

Depending on your situation and goals, it may be a good decision for your financial future. If you decide to take out a personal loan, you’ll want to be sure to keep an eye on how it impacts your credit score.

Want to know more about personal loans? See if applying makes sense for you.

Articles may contain information from third parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third party or information.

* FICO® is a registered trademark of Fair Isaac Corporation in the United States and other countries. Based on FICO® Score 8. Based on Discover Personal Loan customers who were consolidating debt, made on-time payments after account opening, and maintained responsible payment behavior. FICO® Credit Score is based on data from TransUnion and may be different from other credit scores provided by different bureaus. Data reflects loan origination data for the full year of 2022. Results may vary and activity with other credit accounts may impact results. A credit score increase is not guaranteed. Late payments may negatively impact your credit score.