If you are dealing with credit card debt and considering a personal loan as a way to consolidate and then pay it off, you might be wondering, “Do personal loans hurt your credit?” It’s a fair question, especially when you already have some credit card debt and are working to get your financial house in order.
Even if you are credit card debt-free, and are instead considering a personal loan for a small home renovation project, it’s still smart to keep your credit in mind when pursuing a potential loan opportunity.
Whatever the reason for considering a personal loan, it can sometimes help you get from A to B. In this article, we’ll discuss how much taking out a personal loan can impact your credit score. (Spoiler alert, this is a loaded question and the answer is “it depends.” But we’ll at least talk you through all the factors, and hopefully that’ll help you make the right decision for your financial life.)®
How Is Your Credit Score Calculated?
In order to understand how taking out a personal loan can affect your credit, it can help to know the basics of how your credit score is calculated in the first place. According to FICO Ⓡ (a company that generates credit score profiles), there are five principal components used to calculate your FICO Score and each are weighted by importance:
Payment History (35%): Your history of making on-time payments to lenders is a key factor in your credit score.
Amounts Owed (30%): The total amount you currently owe lenders is the second-most important factor in your credit score.
Length of Credit History (15%): The length of time you’ve had credit accounts open and in good standing is also a factor. Opening new lines of credit will bring down the average age of your credit history.
New Credit (10%): This factor takes into consideration the amount of new credit recently taken out.
Credit Mix (10%): This final factor takes into account the different types of credit you hold (credit cards, personal loans, mortgages, etc.)
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Do Personal Loans Hurt Your Credit?
Any debts you have can impact your credit, so taking out a personal loan might lead to a drop in your credit score over the short term. According to this Experian blog post , here’s how a personal loan could negatively impact your credit score:
1. Taking out a loan often requires a hard credit inquiry, which can adversely impact your credit score.
2. The “amounts owed” on your credit score may increase, because you are taking on new debt. (However, if you’re consolidating credit card debt, you may reduce that debt by paying it down with a personal loan.)
3. If you were to miss a payment on your personal loan, that could negatively impact the “payment history” component of your credit score, which specifically looks at whether you make your debt payments on time.
On the flip side, there could also be ways for your personal loan to positively affect your credit score. Here’s how that might happen:
1. Having a new loan type (and paying it back on-time) can positively impact the “new credit” and “credit mix” components of your credit score.
2. Making on-time payments and showing your responsible management of a personal loan is a nice check mark for the “payment history” part of your credit score.
3. If you’re using a personal loan to reduce credit card debt, it replaces a revolving debt (your credit card debt) with an installment loan (a personal loan). Revolving debt is a debt you can continue adding to even when paying it down, whereas an installment loan involves borrowing one specific amount and repaying it in—wait for it—installments. Because you won’t be able to add further debt to your installment loan, it may help you keep your credit utilization ratio under control, which could be a good thing for your credit score.
Why Your Credit Score Matters
Having a stellar credit score can open doors for you over your lifetime. It’s no secret that by making on-time regular payments and building up your credit score, you’re more likely to get better financing offers in the future.
As long as you don’t borrow more than you can pay back and make all scheduled payments on time, of course, a personal loan may have a positive impact on your credit score over the long term. But there’s no one-size-fits-all answer to how a personal loan will impact your credit—it really depends. A smart approach is just to consider how a personal loan fits in with all of your financial goals and make a decision from there.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
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