Table of Contents

What are the factors that affect your credit Score
Do Loans and loans affect Your Score?
A Personal Loan can boost your credit score
What Credit Score Is Needed for a Personal Loan?
The Bottom Line

Loans Personal Credit

How Personal Loans Affect Your Credit Score

They may help you improve your score, but they need to be paid back on time
By David Dierking
Updated July 01, 2021
Review by Thomas Brock
The factual information is verified by Skylar Clarine

A personal loan could affect your credit score in a number of ways, both good and bad. Taking out a personal loan will not harm your credit score in and of the fact that it is a loan in and of. However, it may impact your overall score over the short term and make it harder to get additional credit once the loan is due.

On the other hand the ability to pay off the personal loan punctually will improve your score overall. If you choose to get one, make sure you study and evaluate all of your options thoroughly to get the best possible loan.
The most important takeaways

Your credit score could be lowered temporarily when you get an individual loan due to the fact that you've accumulated additional debt.
Paying back the loan on time not only boosts your score however, it will also help build it over time.
In the short run it is possible that you will not be able get another loan or open a new credit card.

What are the factors that affect your credit Score

To understand how taking out personal loan impacts your credit score, you must know how the scores are calculated. The most widely used credit score by lenders is FICO that was developed by the Fair Isaac Corporation. FICO scores range between 300 and 850.1

They calculate scores based on five factors which include: payment history, the amount owed, the length of history with credit, new credit, and the credit mix. The exact percentages can vary among all three credit ratings agencies, however here is an overview of the amount of importance each factor plays in the calculation, as per FICO:

35% is based upon your payment track record
30% is based on your total debt amount your outstanding debt
15% is based on your history of credit
10 percent is based on new or recently opened lines of credit
10% is based on the credit mix, which is the amount of credit lines you have open (including secured credit cards)2

The three main credit reporting agencies located in the United States that lenders turn to--Equifax, Experian, and TransUnion--provide similar scores regarding your creditworthiness, but there are some slight variations.
Do Loans and loans affect your credit score?

As you can see, getting a new personal loan could impact your credit rating. Your debts have increased, and you have taken on new credit.

The credit bureaus take note of any new financial activity. If, for instance, you attempted to get a car loan shortly after taking out an individual loan and then applied for an auto loan could be denied on the basis that you already have the amount of debt you are able to handle.

Your credit history in general can have more influence on your credit score than one new loan. In the event that you've had a long track record dealing with debt, and paying on time payments, the effect of your score from any new loan is likely to be reduced. The most effective and efficient method to prevent the personal loan from lowering your credit score is to make your payments in time and according to the guidelines in the loan agreement.3
A Personal Loan can boost your credit score

A personal loan which you pay back on time could have a positive impact in your credit rating since it proves that you have the ability to handle debt responsibly.3

Perversely, people who are most averse to taking on loans may have low credit scores. One who never takes on debt and pays it off in installments doesn't have a payments history.4

You can receive a free copy of your credit reports from the three credit bureaus every 12 months, which you can obtain by visiting www.annualcreditreport.com.5
What is the minimum credit score for a Personal Loan?

As mentioned earlier credit scores vary between 300 to 850. The more creditworthy you are, the more likely it will approve your loan application and offer more favorable terms, like a lower interest rate. Each has its own criteria however, generally lenders look at scores that are higher than 670 as an indication that the borrower is creditworthy.6

FICO scores are divided into five categories: poor, fair excellent, fair, very good and outstanding. Here's a breakdown the ranges:

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