Do personal loans affect your credit scores?

Borrowers might use personal loans to make a big purchase, consolidate high-interest debt and access cash. And like any debt, a personal loan could have long-term effects on credit scores. 

What you’ll learn:

• Applying for a personal loan can temporarily affect your credit scores if it requires a hard credit inquiry.

• How a personal loan affects your credit scores is largely dependent on how you manage the loan.

• A personal loan can positively affect your credit scores if you make consistent, on-time payments. 

• A personal loan could also affect your credit mix and total debt, two important credit-scoring factors.

Applying for a personal loan typically results in a hard inquiry, which can lead to a small, temporary dip in your credit scores. A hard inquiry can stay on your credit report for up to two years, but it may only have a negative effect on your credit scores for a year.

Having too many inquiries on your credit report in a short period of time may signal to lenders that your finances have changed negatively. Checking your credit reports and scores can give you a better idea of whether you’ll be approved for a loan. And checking your credit doesn’t hurt your credit scores since it’s considered a soft inquiry.

Personal loans could be reported to the three major credit bureaus, Experian®, Equifax® and TransUnion®, which means they can hurt or help your credit scores. 

Here are a few examples of how a personal loan might cause your credit scores to drop:

It’s important to make payments on time. Payment history can have a significant impact on your credit scores. The better your payment history, the better your credit scores might be. If you make a late payment or miss a payment altogether, that could hurt your credit scores.

Taking out a personal loan will likely increase your total debt, which may affect your credit scores. But FICO®, a major credit-scoring company, notes that having debt doesn’t necessarily mean you’re a high-risk borrower. 

FICO also says total debt doesn’t have as much of an impact on your credit scores as your credit utilization ratio does. But personal loans are typically a form of installment credit, which doesn’t affect credit utilization.

Your credit history is a factor in calculating your credit scores. Taking on a new personal loan could potentially lower the average age of your credit accounts and lead to a dip in your credit scores.

If your personal loan is reported to credit bureaus, the loan could help your credit scores. But this can only happen if you handle the loan responsibly. 

Here are a few ways a personal loan might have a positive impact on your credit scores:

Making on-time payments every month on your personal loan can help you build a positive payment history. A good payment history could help you improve your credit scores.

Your credit utilization ratio is a measure of how much of your available credit you’re using. A personal loan won’t directly impact your credit utilization because it’s a type of installment credit. But using a personal loan to pay off revolving credit debt could lower your credit utilization.

A credit card account is an example of revolving credit, meaning it can be used and paid down repeatedly. Adding an installment loan, such as a personal loan, could diversify your credit mix. And a diverse credit mix could improve your credit scores.

Taking out a loan still means taking on more debt, though. And a good credit mix likely won’t help your credit scores if you can’t keep up with your payments.

Here are more commonly asked questions people have about personal loans and their credit scores.

Applying for a personal loan can temporarily lower your credit scores by a few points. But the overall effect of the loan on your credit scores largely depends on how you manage the loan. If you make consistent, on-time payments, for example, getting a personal loan could help you improve your credit scores over time. 

One way to monitor your credit is with CreditWise from Capital One. You can access your TransUnion credit report and VantageScore® 3.0 credit score anytime, without hurting your scores. CreditWise is free and available to everyone—not just Capital One cardholders. And signing up gives you access to the CreditWise Simulator.

You can also check your credit reports from each of the three major credit bureaus by visiting AnnualCreditReport.com.