Do Personal Loans Affect Your Credit Score? What To Know

Yes, a personal loan can hurt your score at first, but when used responsibly, it may help you:

• Build a positive payment history

• Show that you can responsibly manage borrowed money

• Add variety to your credit mix

However, if you overextend yourself or miss your payments, your credit score could drop. Here's how a personal loan can affect your credit and what you can do to protect your score while paying it off.

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Key Takeaways

• Potential credit benefits: A personal loan may help your credit score by building positive payment history, improving your credit mix and lowering credit utilization if you use it to pay off credit card debt. These benefits depend on how you manage the loan and your other accounts.

• Short-term and long-term risks: Applying for a personal loan typically triggers a hard inquiry that may temporarily lower your score. Missed payments and accumulating additional debt can have a more significant impact over time.

• When to consider a personal loan: A personal loan may make sense if you need to borrow money and have a clear repayment plan. If your only goal is to improve your credit score, consider lower-cost credit-building alternatives first.

How a Personal Loan Can Help Your Credit Score

A personal installment loan can help your credit score in a few key ways.

• Payment history: Making on-time payments can help you build a positive payment history, which is the most influential factor in your credit score.

• Improve your credit mix: If you've only got one or two types of credit, such as credit cards, adding an installment loan may help diversify your credit mix.

• Credit utilization: Using a personal loan to pay down credit card debt can lower your credit utilization ratio, which may help improve your score.

For example, if you have a $4,000 balance on a credit card with a $5,000 limit, your credit utilization is 80%. If you use a personal loan to pay off $3,000 of that balance, your utilization drops to 20%.

Responsibly using your loan can help take your credit score to the next level.

How a Personal Loan Can Hurt Your Credit Score

A personal loan can also hurt your credit score, especially if you have trouble keeping up with payments. Here are some potential risks:

• Hard credit inquiry: Applying for a personal loan typically triggers a hard inquiry, which may temporarily lower your credit score by a few points.

• Late or missed payments: Missing monthly payments can significantly hurt your credit score, especially if they're reported to the credit bureaus.

• Racking up debt after consolidation: If you use your personal loan to consolidate debt but then accumulate new balances, you could end up with more debt and monthly payments that you can afford.

• New account: Opening a personal loan can lower the average age of your credit accounts, which may temporarily affect your score.

• Debt-to-income (DTI) ratio: Taking on a new loan may increase your DTI ratio, making it harder to qualify for additional credit.

Keep in mind that your credit score may dip when you first apply for a personal loan, even if you make every payment on time.

Your Timeline: When and How Long the Credit Impact Lasts

Your credit score may change at different stages of repaying a personal loan. Here's what you can generally expect.

Months 1 to 3: Initial Credit Impact

When you apply for a personal loan, the lender typically performs a hard credit inquiry. This may lower your score by a few points. Opening a new account can also reduce the average age of your credit accounts.

Months 4 to 12: Building Payment History

As you make consistent, on-time payments, you begin building a positive payment history. This may help offset some of the initial impact of opening the loan, though improvements aren't guaranteed.

After Year 1: Long-Term Credit Impact

Continuing to make payments on time can help strengthen your credit profile over time. Hard inquiries generally stop affecting your FICO score after one year, although they remain on your credit report for two years.

Keep in Mind

Making at least your minimum monthly payment on time is one of the most important things you can do. Missed payments can hurt your credit score and may result in late fees or other penalties.

Should You Get a Personal Loan To Build Credit?

Even if you're brand new to credit, there are loans designed to jumpstart your journey into the credit world. However, taking out a traditional personal loan solely to improve your score may not be worth the interest and fees.

This checklist can help you decide what's best for you.

Consider a Personal Loan If

• You'd like to consolidate high-interest credit card debt.

• You can stay on top of the payment schedule.

• You want to lower your credit utilization by paying off credit card balances.

Consider Another Option If

• You're currently having trouble making payments.

• You don't have a clear plan to repay the debt.

• You're only looking for a credit score boost.

4 Best Practices for Protecting Your Credit While Repaying

Here are four ways to manage your personal loan and protect your credit score.

1. Make Every Payment on Time

Late payments can significantly hurt your credit score. Set up autopay if your lender offers it to help avoid missed payments. Negative payment history can remain on your credit report for up to seven years.

2. Don't Take Out More Than You Need

Only borrow as much as you need and can comfortably afford to repay. If you’re weighing an early payoff later on, learn how loan payoff may affect your credit before making a decision

3. Monitor Your Credit Regularly

Keeping an eye on your credit can help you spot errors, missed payments or potential fraud before they become bigger problems.

4. Avoid Taking Multiple Loans at Once

Managing more than one loan at a time can make repayment more difficult. Multiple applications may also result in hard inquiries, while additional loan payments can increase your DTI ratio.

Alternatives That Can Also Build Credit

You don't have to resort to a personal loan to build your credit profile. If you're just getting started or don't need to borrow money, these alternatives may be worth considering:

• Secured credit cards: These are often a good option for beginners. You'll provide a security deposit when you open the account, which typically determines your credit limit. Be sure to pay on time and keep your balance low.

• Become an authorized user: Being added to someone else's well-managed credit card may help your credit history, depending on whether the issuer reports authorized-user activity.

• Use rent or utility reporting services: Some services, such as Experian Boost, allow eligible rent or utility payments to be added to credit reports. Whether they affect your score depends on the scoring model used.

FAQs

Will my credit score drop when I apply for a personal loan?

Your credit score may drop slightly when you apply for a personal loan because lenders typically perform a hard credit inquiry. The impact is usually temporary, and prequalifying with a soft credit check generally won't affect your score.

How long does a hard inquiry stay on my credit report?

A hard inquiry can remain on your credit report for up to two years, but it generally affects your FICO score for only one year.

What happens if I miss a payment on my personal loan?

Missing a payment may result in late fees or other penalties. If the payment is at least 30 days late and reported to the credit bureaus, it can significantly hurt your score.

Does paying off a personal loan early hurt or help my credit?

Paying off a loan early isn't a bad thing. It can save you money on interest, but may cause a small credit score change when the account closes. The impact depends on your overall credit profile, and a closed account in good standing can remain on your credit report for up to 10 years.

Key Terms

• Personal loan: A personal loan is a lump sum of money you borrow from a lender and repay in fixed monthly installments, usually at a fixed interest rate.

• Credit score: A credit score is a three-digit number between 300 and 850 that lenders use to gauge how likely you are to repay borrowed money on time.

• Hard inquiry: A hard inquiry happens when a lender checks your credit report to make a lending decision. It can lower your credit score by a few points and stays on your report for up to two years.

• Credit utilization: Credit utilization is the percentage of your available revolving credit you're currently using. Keeping it below 30% can help your credit score.

• Credit mix: Credit mix refers to the different types of credit accounts you have, such as credit cards, mortgages and personal loans. A varied mix can boost your credit score.

• DTI ratio: Your debt-to-income ratio compares your total monthly debt payments to your gross monthly income. Lenders use it to decide if you can take on more debt.

Sources

• Consumer Financial Protection Bureau. 2026. "What is a credit score?"

• Consumer Financial Protection Bureau. 2025. "What is a credit inquiry?"

• MyFICO. "What is Amounts Owed?"

• MyFICO. "What Does Credit Mix Mean?"

• Consumer Financial Protection Bureau. 2023. "What is debt-to-income ratio?"

Photo Credit: NoSystem images / iStock.com

Parts of this article were created with AI assistance. MoneyLion editors reviewed, fact-checked and edited the final version and are responsible for its accuracy.