What's the Difference Between a Hard and Soft Credit Check?

What’s the Difference Between a Hard and Soft Credit Check?

The main difference between a soft vs. hard credit check is that each hard check can knock a few points off your credit score, whereas soft checks don’t affect your score. Both hard and soft checks pull the same financial data but for different purposes. Hard checks are typically done when you apply for a loan or credit card; soft checks are conducted for most other purposes, such as pre-screening for credit card offers.

It’s important for consumers to understand this difference because too many hard checks — also known as hard pulls and hard inquiries — can significantly lower your credit score. This in turn can hurt your chances of getting the best offers on credit cards and loans. Keep reading to learn more about credit checks and how to prevent unnecessary hard checks of your credit file.

What Is a Soft Credit Inquiry?

A soft inquiry is when a person or company accesses your credit as part of a background check. They will be able to look at:

•   The number and type of all your credit accounts

•   Credit card balances

•   Loan balances

•   Payment history for revolving credit (credit cards and home equity lines of credit)

•   Payment history for installment loans (auto loans, mortgages, student loans, and personal loans)

•   Accounts gone to collections

•   Tax liens and other public records

Soft inquiries are not used during loan or credit card applications, and do not require the consumer’s permission or involvement. Reasons for a soft check can include:

•   Employment pre-screening

•   Rental applications

•   Insurance evaluations

•   Pre-screening for financial offers by mail

•   Loan prequalification

•   Checking your own credit file

•   When you’re shopping personal loan interest rates or credit cards

Soft credit checks do not affect your credit score, no matter how often they take place. Some soft checks appear on your credit report, but not all — you may never find out they took place.

When they are listed, you might see language like “inquiries that do not affect your credit rating,” along with the name of the requester and the date of the inquiry. Only the consumer can see soft inquiries on their report; creditors cannot.

Recommended: Does Applying for Credit Cards Hurt Your Credit Score?

What Is a Hard Credit Inquiry?

A hard credit inquiry typically takes place when you apply for credit, such as loans or credit cards, and give permission for the lender or creditor to pull your credit file. As with a soft credit pull, the lender will look at the financial information listed above.

Each hard pull may lower your credit score — but typically by less than five points, according to FICO® Score. All hard inquiries appear on your credit report. While they stay there for about two years, they stop affecting your credit score after 12 months.

Not all loans require a hard credit inquiry — but consider that a red flag. Some small local lenders may offer short-term, high-interest, unsecured personal loans. Borrowers must show proof of income via a recent paycheck, but no credit check is required. The risks of these “payday loans” are so great that many states have outlawed them.

Avoiding Hard Credit Inquiries

Consumers should carefully consider if they really need new credit before applying for an account that requires a hard credit check.

For example, department stores and some chains like to entice you to apply for their store credit card by offering a generous discount on your purchase as you’re checking out. In that situation, ask yourself if it’s worth a credit score hit (albeit a small one).

Another way to minimize hard inquiries is to ask which type of credit check a company intends to run. If, for example, a cable company usually requires a hard credit inquiry to open an account, you might ask if a hard pull can be avoided. Other situations where there may be some flexibility include:

•   Rental applications

•   Leasing a car

•   New utility accounts

•   Requesting a higher credit limit on an existing account

Disputing Inaccurate Hard Inquiries

A good financial rule of thumb is to review your credit reports every year to check for common credit report errors and signs of identity theft. You can access your credit reports from the three consumer credit bureaus (Equifax, Experian, and TransUnion) for free at AnnualCreditReport.com.

To check for inaccurate hard inquiries, look for a section on your credit report with any of these labels:

•   Credit inquiries

•   Hard inquiries

•   Regular inquiries

•   Requests viewed by others

You can dispute hard inquiries and remove them from your credit reports under certain circumstances: if you didn’t apply for a new credit account, you didn’t give permission for the inquiry, or the inquiry was added by mistake.

That said, under federal law, certain organizations with a “specific, legitimate purpose” can access your credit file without written permission. They include:

•   Government agencies, usually in the context of licensing or benefits applications

•   Collection agencies

•   Insurance companies, when certain restrictions are met

•   Entities that have a court order, as in child support hearings

Even so, if you didn’t give permission for a hard credit pull, it’s worth filing a dispute to request that the credit check be removed from your report.

Consumers may dispute hard inquiries online through AnnualCreditReport.com, or by writing to the individual credit reporting agencies.

Hard Credit Checks and Your Credit Scores

As mentioned, hard inquiries appear on your credit report, and each hard pull may lower your credit score by five points or less. Here we’ll go into a bit more detail.

Why Hard Inquiries Matter

Multiple hard inquiries within a short time frame can do significant damage to your credit score. It could potentially be enough to move you from the Good credit range down to the merely Fair. Someone in a Fair credit range can pay substantially more over a lifetime in interest and fees than someone with a Good score or higher.

How Many Points Will a Hard Inquiry Cost You?

As noted above, each hard pull can lower your credit score by less than five points. One or two hard inquiries per year may not matter, especially if you’re not planning on applying for a loan.

If you’re rate shopping for a particular type of loan, such as a mortgage or auto loan, keep in mind that multiple hard credit checks within a specific period (often several weeks) for the same purpose are usually counted as one inquiry by credit scoring companies. However, this is not the case with hard pulls for credit card applications.

How Long Do Inquiries Stay On Your Credit?

Hard inquiries stay on your credit report for two years. While they’re on your credit report, they are visible to anyone who checks your credit. But their impact on your credit score typically lasts less than 12 months.

Soft inquiries may remain on your credit report for one or two years, but only you can see them.

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The Takeaway

Soft credit inquiries do not affect a credit score, while hard credit inquiries may cost you a few points. In both cases, individuals or businesses pull information from your credit reports. Checking your own credit report counts as a soft pull, as do most other situations where the consumer hasn’t given written permission. Hard pulls are typically done only when you’re applying for a loan or new credit account.

Many lenders allow you to “prequalify” for a loan without running a hard credit check. This allows you to shop rates without risking any impact to your credit.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.


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Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

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 website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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10 Strategies for Building Credit Over Time

Broadly speaking, the best way to build credit is actually quite straightforward: Be the kind of borrower you’d want to lend to. While that might sound simple, it isn’t always second nature to know exactly how to go about doing that. For instance, you might know it’s critical to make payments on time, but you might not be aware that it’s important to keep your unused credit cards open.

If you’re setting out on your journey toward building credit, here’s a rundown on how to build credit, with 10 strategies you can stick to.

Strategies for Building Credit

1. Acquire Credit

Perhaps the first crucial step in how to build credit is to acquire credit accounts. For someone who does not have a credit history of their own, getting a co-signer or becoming an authorized user on an established cardholder’s account can help you get started. You might also consider a secured credit card or applying for a credit card designed specifically for students. Or you can look into a credit-builder loan.

In the long run, however, you’ll be in a much stronger position if you can borrow in your name alone. Establishing credit of your own can make it easier to borrow in the future for such things as an auto loan, a personal loan, or even a mortgage.

2. Pay Bills Consistently and On Time

Timely payments are crucial, and making at least the minimum payment each month on a revolving credit line can make a positive impact on your credit score.

That’s because payment history makes a bigger impact on a person’s credit score than anything else. A borrower’s credit score summarizes their health and strength as a borrower, and payment history makes up 35% of that score on a credit rating scale. So the most important rule of credit is this: Don’t miss payments.

Many lenders will actually allow you to customize due dates so they line up with pay dates, and most let you set up automatic payments from a checking or savings account. Take the time to find what works for you to make your payments in a timely fashion.

Recommended: When Are Credit Card Payments Due?

3. Manage Your Credit Utilization Rate

The further away a person is from hitting their credit limit, the healthier their credit score will be, in most circumstances. A borrower’s debt-to-credit ratio, also known as the credit utilization rate, should ideally be no more than 30%. Higher utilization rates can negatively affect a person’s credit score.

Paying revolving credit lines in full each month can have a positive impact on your credit score because doing so essentially lowers your credit utilization rate. Additionally, keeping tabs on your credit utilization rate before continuing to swipe is key to using a credit card wisely.

4. Keep Unused Credit Cards Open

Lenders want to see accounts maintained in good standing for a long time. As such, a credit history looks better when it has a solid number of accounts in good standing that have been open for a while. When debt accounts are closed, that history ends, and eventually closed accounts drop off your credit report entirely.

To keep this from happening, avoid closing old credit cards, even if you’re not using them anymore. You might consider using these accounts to automate a few bills, like car insurance or a monthly subscription account, to avoid account closure due to inactivity.

5. Diversify Your Credit Mix

Having a diverse mix of credit products can also have a positive impact on a person’s credit, accounting for 10% of a credit score calculation.

Opening at least one credit card is a good step for most borrowers. Using a personal loan to finance a large purchase with a relatively low interest rate, and paying off that personal loan on time, can also have a positive impact on a person’s credit. Student loan refinancing can be another way to diversify your credit mix, while potentially lowering your interest rate.

However, while having a mix of credit can help your standing as a borrower, it’s not a good idea to open a line of credit that’s not needed just to increase your mix of credit types. Instead, stick to applying only for credit you actually need and that you’re confident you can afford to pay off.

6. Check Your Credit Report

It’s recommended to check your credit reports from the three major credit bureaus at least once a year. Doing a regular review of your reports is a good way to monitor your overall credit health and understand the impacts of different activities. It’s also important to make sure that everything listed in your credit report is accurate, and to flag any errors or fraudulent activity.

Where Can You Track Your Credit Score?

You can get a free copy of your credit report every 12 months from each of the three major credit bureaus (Equifax, Experian, and TransUnion). Request your copy online by visiting AnnualCreditReport.com. Note that you can also request a copy anytime you experience an adverse action based on your credit report (like being denied for a loan), among other circumstances.

Checking your credit score is even easier. While it’s not included in your credit report, you can get your current score from your credit card company, financial institution, or on a loan statement. Another option is to use a free credit score service or site. If you’re tracking changes to your credit score, it’s helpful to know how often your credit score updates and then check in accordingly.

7. Limit Credit Applications

When making major life changes, like starting a job, getting married, or having children, sometimes multiple lines of credit might be helpful to get through it all. Financial institutions understand that, but they also know that, historically, people who borrow a lot of money at once from multiple sources tend to have more difficulty paying them back. Spreading out credit applications over time whenever possible typically has a lower impact on an overall credit score.

Recommended: What Is the Average Credit Card Limit?

8. Avoid Overspending

Perhaps one of the most effective ways to ensure you keep building your credit in the right direction is to only spend what you can afford to pay off. This will help you more easily maintain a lower credit utilization rate, and it can prevent you from racking up a balance and falling into a debt spiral.

Plus, if you pay off your balance in full each month, as opposed to only making the minimum payment, you can avoid incurring interest charges. This is a perk that’s foundational to what a credit card is.

9. Get Credit For Other Bills You Pay

If you’re early in your credit building journey, it can help to get credit for other payments you’re making on time, such as your rent payment, utility bills, or even streaming services fees. For instance, Experian Boost adds on-time payments in other accounts to your Experian credit report. There are also a plethora of rent-reporting services out there that will report your timely rent payments to the credit bureaus.

10. Pay Off Any Existing Debt

Another important strategy toward building credit is to pay down any debt you may currently have. Especially important when it comes to the time it takes to repair credit, saying goodbye to existing debt allows you to lower your credit utilization rate, which in turn builds your credit score. There are a number of tactics out there for paying off debt, from a debt consolidation loan to a balance transfer credit card.

What Is a “Good” Credit Score?

A “good” credit score is considered within the range of 670 to 739 under the FICO Score, the credit scoring model most commonly used by lenders. “Very good” is considered anywhere from 740 to 799, while “exceptional” is 800 and above.

Keep in mind, however, that these exact credit score ranges can vary a bit from model to model. For instance, in the VantageScore® range, a score of 661 to 780 is considered “good.” In general though, anything in the upper 600s is generally within the range of a “good” credit score.

How Long Does it Take to Build Your Credit Score?

According to Experian, one of the three major credit bureaus, it generally takes around three to six months of data to generate an initial credit score.

Credit card issuers typically don’t report account activity until the end of the first billing cycle, so it’s worth waiting a month or two before you check in on the status of your score. If you’re anxious to ensure your activity counts, it’s also a good idea to check with your issuer to make sure they report to the credit bureaus.

What Can You Do with “Good” Credit?

The importance of having good credit can’t be overstated. By building credit, you’ll have easier access to borrowing opportunities in the future, whether that’s an auto loan for a new car or a mortgage for a new home. A better credit score also allows you to secure better terms, such as lower interest rates and a higher borrowing capacity.

The Takeaway

As you can see, there are a number of ways to build credit. First and foremost, you’ll want to make sure you’re following the tenets of responsible credit usage, as these are arguably the best ways to build credit. From there, you can consider additional credit building strategies, such as ensuring that your on-time rent and utility payments count.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

How long does it take to build credit?

Once you open your first credit account, it generally takes around three to six months to start building a credit score.

How do I establish credit with no credit history?

There are several ways to establish credit if you have no credit history. Some strategies to explore include becoming an authorized user on a friend or family member’s credit card account, applying for a secured credit card, applying for a retail card, taking out a credit-builder loan, and reporting your on-time rent and utility payments to the credit bureaus.

How can I improve my credit as quickly as possible?

Though it takes time to repair or build credit, there are some steps you can take. For starters, work on paying down credit cards with high balances. And be sure to pay your bills on time, every time. If you’re having trouble keeping track of due dates, consider setting up autopay or calendar reminders for yourself.


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 website .

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Is Your Credit Card Spending Limit Too High?

The credit limit on a credit card is the maximum amount you can spend before needing to repay it. A high credit card spending limit can provide spending power to people who can pay off their debt on time and not incur too much in the way of interest charges and fees. However, for people who use a high credit card spending limit as permission to overspend, there can be problems.

You can request a credit limit increase, but credit card issuers sometimes automatically increase the credit limit of those who have shown they can manage credit well. But is a higher spending limit a good thing? It may not be for everyone’s financial situation. Here’s how to know if your credit card spending limit is too high.

How Does My Credit Card Spending Limit Work?

Credit cards are a form of revolving debt, which means that there is an upper spending limit. However, the credit can be repaid and used again. It revolves between being available to use, being unavailable because it’s being used, and being available to use again after it’s been repaid.

A credit card issuer typically bases the credit limit on factors such as the applicant’s credit score, income, credit history, and debt-to-income ratio. However, every credit card company differs in which factors it considers and how much emphasis it places on each component.

There may be multiple types of credit limits on the same credit card, e.g., a daily spending limit or cash advance limit.

How much is typical? The current credit card limit for the average American is almost $30,000. However, it’s worth noting, it doesn’t mean you should spend the full amount of your limit.

In fact, you may want to spend no more than 30% of your limit to maintain your financial wellness and to help build your credit score. In fact, many financial experts suggest a credit utilization of 10%. That would mean that if, say, your credit limit was $30,000, you would only carry a balance of $3,000.

Why Your Credit Card Issuer Increased Your Spending Limit

Your spending limit isn’t set in stone, though. Even if you haven’t specifically requested a credit limit increase, your credit card issuer may automatically increase the credit limit on your card.

There are various reasons this might happen.

•   Your credit has improved, resulting in a higher credit score.

•   Your income has increased.

•   The credit card issuer wants to retain you as a customer by offering a higher credit limit.

By increasing your credit card spending limit, the credit card issuer may have hopes that you’ll carry a balance on your card.

One stream of revenue for them is interest charges and fees. If you carry a balance, rather than paying your balance in full each month, you’ll be charged interest on the outstanding amount. And if you fail to make at least the minimum payment due or pay the bill late, you’ll likely be charged a late fee.

Both interest charges and fees are then added to the balance due on the next statement, and themselves incur interest. Essentially, you’ll be paying interest on interest.

Pros of a High Credit Card Spending Limit

For some people, due to their financial needs or goals, there may be practical reasons for having a high credit card spending limit.

•   It can be helpful in an emergency situation. Even if you’ve accumulated an emergency fund or rainy day fund, there might be instances when you need more than that. For instance, if your refrigerator suddenly stops working, you’ll probably want to replace it sooner rather than later. Large appliances can cost several thousand dollars to purchase and have installed.

•   Having a high credit limit while using a small percentage of it can lower your credit utilization rate. Your credit utilization rate is the relationship between your spending limit and your balance at any given time. If your limit is $10,000, and your balance is $1,500, your credit utilization is 15%. Generally, the lower your credit utilization rate, the better (below 30% or closer to 10% is best).

•   If you have a rewards credit card, having a higher spending limit on it could mean reaping greater rewards, whether that’s cash back, miles, or another type of reward. Being financially able to pay the account balance in full each month is key to making the most of this strategy.

Cons of a High Credit Card Spending Limit

As attractive as the benefits might sound, there can be drawbacks to having a high credit card spending limit.

•   You might be tempted to spend because you can, even if you can’t pay your credit card balance in full at the end of the billing period. This will result in purchase interest charges being added to the unpaid balance, and interest will accrue on this new, larger balance. It can become a debt cycle for some people.

•   Having a high credit limit and using a large percentage of it can increase your credit utilization rate. This rate is one of the most important factors in the calculation of your credit score — it accounts for 30% of your FICO® Score, and is considered “extremely influential” to your VantageScore®. It’s generally recommended to keep your credit utilization rate to 30% or less, as mentioned above.

•   Requesting an increase in your credit card spending limit could cause your credit score to decrease slightly. The credit card issuer might do a hard credit inquiry into your credit report, which can mean a ding of several points (say, between five and 10) to your credit score, depending on your overall credit. It’s usually a temporary drop, but if you’re planning to apply for a loan or other type of credit, it could make a difference in the interest rate you’re offered.

What Happens if You Go Over Your Spending Limit

The Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit CARD Act) put consumer protections against unfair credit card practices into place. One of the stipulations in this Act is that credit card issuers cannot charge an over-the-limit fee unless the card holder opts into an agreement for charges above the credit limit to be paid.

If you choose not to opt in to this agreement, any charges you try to make that exceed your credit card spending limit will be denied.

If you do opt in, the excess charges will be paid, but the credit card issuer may charge a fee for covering the overage amount. Generally, the first-time fee can be up to $25. If you exceed your spending limit a second time within six months, you could be charged up to $35. The fee can’t be larger than the amount you went over your credit limit by, though. So, if you charge a purchase that’s $100, but you only have $90 of available credit, the over-limit fee would be $10.

Before you opt in to an agreement like this, the credit card issuer must tell you what potential fees there might be. They must also provide you with confirmation that you opted in.

If you opted in to an over-the-limit agreement, but no longer want it, you can opt out at any time by contacting your credit card issuer’s customer service department.

Recommended: Maxed-Out Credit Card: Consequences and Steps to Bounce Back

Taking Control of Credit Card Debt

A higher spending limit can be a good thing if it’s used responsibly. Looking for a credit card that has more favorable rewards or offers perks that your current credit cards don’t have could be a good option for managing your debt.

If you’re struggling with credit card debt and a higher credit card spending limit is not an option for your financial situation or comfort level, another possible option could be to consolidate high-interest credit card debt with a personal loan.

With a credit card consolidation loan, all your balances are merged into one new loan with just one monthly payment and one interest rate instead of several. This new interest rate could end up being lower than the rates on your current individual credit cards, which could lower your monthly debt payment.

Also, a personal loan is installment debt, which means there will be a payment end date. Credit cards are revolving debt with no firm end date.

The Takeaway

A higher credit card spending limit may or may not be a positive thing, depending on your financial situation. You may have requested a credit limit increase or your credit card issuer may have automatically increased your spending limit because of factors such as an improved credit score or increased income, among others. But if the amount of credit you’ve been approved for results in poor financial decision making or increased debt, your credit card spending limit may be too high.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

What’s the average credit card limit?

Currently, the average credit card limit is close to $30,000.

Can a spending limit be too high?

Depending on your financial situation, a spending limit could be too high. If that high limit encourages you to overspend and carry a high level of debt at a high interest rate, it could be problematic.

Is it bad to use 50% of your credit limit?

Financial experts recommend that you use no more than 30% of your credit limit, preferably close to 10%. Going higher than that can negatively impact your credit score and your financial health.


Photo credit: iStock/mixetto

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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 website .

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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How a Personal Loan Can Boost Your Credit Score

Will a Personal Loan Build Credit?

One factor lenders look at during loan processing is the applicant’s credit score. It’s a good idea to review your own credit reports before applying for a loan to see if there are any errors that can be corrected and possibly increase your credit score, if needed.

If your credit score is not as high as you’d like it to be, it may seem counterintuitive to consider taking on debt to increase it. But it’s a method that has some merit. Making timely payments on a personal loan may have a positive effect on a person’s credit score. Let’s take a look at what factors go into calculating a credit score and how taking out a personal loan can affect it.

Do Personal Loans Help Build Credit?

If a borrower makes on-time, regular payments on a personal loan — or any loan, for that matter — that information will typically be reflected in their credit history and can be one way to build credit. It’s a good idea to ask the lender if they report payment history to the three major credit bureaus: Experian, Equifax, and TransUnion. If the lender doesn’t report the information, it won’t affect the borrower’s credit positively or negatively.


💡 Quick Tip: A low-interest personal loan from SoFi can help you consolidate your debts, lower your monthly payments, and get you out of debt sooner.

When Does a Personal Loan Help You Build Credit?

Someone who doesn’t have much of a credit history or wants to improve their credit score because they understand the importance of good credit might wonder if a personal loan will build credit. It certainly can be one method to do so, but only if handled responsibly. A personal loan to build credit can be an effective tool if the payments are made regularly and on time.

The terms “credit” and “credit score,” while closely related, are not the same. Generally, when the term “credit” is used, it’s referring to a credit report, which is a summary of a person’s financial history. The information contained in a credit report is what affects your credit score. So, while the two are different, they’re used together in lending and other credit matters.

To find financial areas needing improvement, you can review your credit report for individual elements that figure into the calculation of your credit score. Credit score updates can happen every 30 to 45 days, depending on when lenders report payment information to the credit bureaus, and small fluctuations are normal.

Recommended: 11 Types of Personal Loans

Your Payment History

The way you handle debt is the most important factor in determining your credit score. It accounts for 35% of a person’s FICO® Score. How you’ve repaid — or not repaid — debt in the past is considered a good indicator of how likely you are to repay future debt and is something lenders look at closely.

Missing payments or late payments on a personal loan might hurt your credit score.

Your Credit Utilization Ratio

Second only to payment history, having a large debt-to-credit ratio, also called your credit utilization ratio, can damage your credit score. It accounts for 30% of the total FICO Score and takes into account both revolving debt (e.g., credit cards) and installment debt (e.g., personal loans).

This ratio is calculated by dividing how much you currently owe by the total credit available to you. Credit cards offer a good example: If you have a monthly limit of $10,000, and typically carry a balance of $9,000 on your card each billing period, your utilization ratio would be 90%.

The Age of Your Credit History

Since the age of your credit history is a factor in your credit score, the ideal situation is to start building credit early. That’s not always feasible, though. If you don’t have much of a credit history yet, a personal loan to build credit can be useful.

As long as the loan’s payment history is positive, the longer a loan is listed on your credit report, the more likely it is to have a positive effect on your credit score.

Adding Different Types of Credit

An additional factor that can impact your credit score is the mix of different types of credit you might have, such as credit cards, student loans, and mortgage loans. In general, your credit score will benefit from a healthy mix of different kinds of debt on your credit report.

Having both revolving debt, like credit cards or lines of credit, as well as installment debt, such as a personal loan, can have a positive effect on your credit score if you’re making regular, on-time payments on the debts.

If you currently have only credit cards, adding a personal loan to your credit mix can go a long way in establishing multiple types of credit and potentially boosting your credit score.

Recommended: Personal Lines of Credit vs Credit Cards

When Doesn’t a Personal Loan Help You Build Credit?

We’ve covered some of the ways a personal loan can help build credit, but there are situations in which a personal loan might have a negative effect on your credit.

Late Payments

Making late payments on any type of debt, including a personal loan intended to build credit, will likely have the opposite effect. Lenders place a great deal of importance on a person’s payment history. If a lender sees a lot of late or missed payments on your credit report, they are probably more likely to see you as a credit risk.

Short-Term Loan

Short-term loans can be predatory loans. They are meant to help someone make ends meet until their next paycheck, but they can be next to impossible to actually pay off because of the extraordinarily high interest rates typically charged.

Lenders of these types of loans may not report payments to the credit bureaus, essentially negating any effect your responsible repayment might have. If you’re thinking of taking out a personal loan to improve your credit score, a short-term loan is probably not the best option.


💡 Quick Tip: Just as there are no free lunches, there are no guaranteed loans. So beware lenders who advertise them. If they are legitimate, they need to know your creditworthiness before offering you a loan.

The Takeaway

Personal loans have many direct benefits, such as access to cash, predictable payments, and consolidating high-interest debts. But can a personal loan help you build credit? Possibly. A loan’s secondary impact on your credit score can be meaningful for your borrowing future. Making your personal loan payments on time may help you improve your credit score and your future borrowing options.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.


SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.

FAQ

Do personal loans raise credit scores?

If repaid on time with regular payments, a personal loan is one financial tool that might have a positive effect on a person’s credit score. There are a variety of factors that go into the calculation of a credit score, though, and it’s wise to pay attention to all of them.

How long does it take to build credit with a personal loan?

Building credit means building a history, which doesn’t happen overnight. It might take about six months to see results from diligently making on-time personal loan payments.

Is taking out a personal loan bad for credit?

Taking on new debt can have a temporary negative effect on your credit score. But over time, as long as you make regular, on-time payments, a personal loan has the potential to help your overall creditworthiness.

Which types of personal loans typically help build credit?

There are many different types of personal loans you can use to build up your credit. If you have no credit history, you may want to explore a credit builder loan or secured credit card. Both can help you establish a positive credit profile. But keep in mind, the type of loan you take out is not as important as how you manage the debt.


SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.


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 website .

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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What Is a FICO Score? FICO Score vs Credit Score

A credit score is one factor used in a lender’s assessment of your creditworthiness when you apply for a lending product, such as a loan, line of credit, or credit card. It can also be a factor in lease approval, new utilities setup, and insurance rates. You can have more than one credit score, depending on what credit scoring model a lender uses.

One type of credit scoring model is the FICO® Score, which is used in 90% of lending decisions in the U.S. Since it’s such a widely used determiner, consumers are wise to pay close attention to their own score.

What Is a FICO Score?

The FICO Score is a trademark of the Fair Isaac Corporation. It was the first widely used, commercially available score of its type. FICO Scores essentially compress a person’s credit history into one algorithmically determined score.

Because FICO scores (and other credit scores like it) are based on analytics rather than human biases, the intention is to make it easier for lenders to make fair lending decisions.

💡 Quick Tip: Before choosing a personal loan, ask about the lender’s fees: origination, prepayment, late fees, etc. SoFi personal loans come with no-fee options, and no surprises.

What Is the FICO Score Range?

FICO’s base range is 300 to 850: The higher the score, the lower the lending risk a lender might consider you to be.

•   Exceptional: 800 to 850

•   Very Good: 740 to 799

•   Good: 670 to 739

•   Fair: 580 to 669

•   Poor: 300 to 579

Recommended: What Is Considered a Bad Credit Score?

How Is a FICO Score Calculated?

There are five main components of your base score, each having a different weight in the calculation:

•   Payment history: 35%

•   Amounts owed: 30%

•   Length of credit history: 15%

•   Credit mix: 10%

•   New credit: 10%

About two-thirds of your base FICO score depends on managing the amount of debt you have and making your monthly payments on time. Each of the three major credit bureaus — Experian, Equifax, and TransUnion — supply information for the calculation of your credit score, so it can vary slightly even if your creditworthiness doesn’t fluctuate.

The base FICO Score range may not be the range used in all credit and lending decisions. There are also industry-specific scores, such as one specifically for auto loans (FICO Auto Scores), others for credit card applications (FICO Bankcard Scores), and multiple FICO scores used by mortgage lenders.

Industry-specific FICO scores range from 250 to 900, compared to the 300 to 850 range for base scores.

What Is a Good FICO Score?

Strictly referencing the base FICO Score range, a “good” score is between 670 and 739 on the overall scale of 300 to 850.

But what’s considered acceptable for credit approval might vary from lender to lender. Each lender has its own requirements for credit approval, interest rates, and loan terms, and may assign its own acceptable ranges. Lenders may also use factors other than a credit score to determine these things.

Recommended: Average Personal Loan Interest Rates & What Affects Them

Why Is a FICO Score Important? What Is a FICO Score Used For?

As mentioned above, the FICO Score is used in 90% of lending decisions in the U.S. When a consumer applies for a loan or other type of credit, the lender will look at their credit report and credit score. If there are negative entries on the credit report, which may be reflected in a decreased FICO Score, the applicant may not have a chance to explain those to the lender. Especially in mortgage lending decisions, the lender may have a firm FICO Score requirement, and even one point below the acceptable number could result in a denial.

But what if you’re not applying for credit in the traditional sense? Your FICO Score is still an important number to pay attention to because it’s used in other financial decisions.

•   Renting an apartment. Landlords and leasing agents generally run a credit check during a lease application process. They may or may not look at the applicant’s actual credit score — landlords have a lot of flexibility in how they make leasing decisions — but they do tend to look at the applicant’s credit history and how much debt they have in relation to their income — factors that go into a FICO score calculation.

A few late payments here and there may not affect your ability to rent an apartment, but a high debt-to-income ratio may. If you have a lot of income going toward debt payments, the landlord may be concerned that you won’t have enough income to pay your rent.

•   Insurance. One of the industry-specific FICO Scores is formulated for the insurance industry (think auto insurance and property insurance). Insurers will typically look at more than just a person’s FICO Insurance Score, but it is one factor that goes in determining qualification for insurance and at what rate. The assumption is that a person who is financially responsible will also take more care when it comes to their home and car.

•   Utilities. You may not think of a utility bill as a debt, but since utilities like gas, electric, and phone are billed in arrears, they technically are a form of debt. “Billed in arrears” means that you are billed for services you have already used. Utility companies want to make sure that you will be able to pay your monthly bill, so they may run a credit check, which may or may not include looking at your FICO Score.

Recommended: What Credit Score Is Needed to Rent an Apartment in 2024?

What Affects Your FICO Score?

We briefly touched on how a FICO Score is calculated, but what goes into those different categories? Let’s look at those in more detail.

Payment History (35%)

Do you tend to pay your bills on time or do you have a history of late or missed payments? Your payment history is the most important factor in the calculation of your FICO Score. Perfection isn’t necessary, but a solid track record of regular, on-time payments is important. Lenders like to be assured that a borrower will make their payments, and a past payment history tends to be a good predictor of future payment habits.

Both installment (personal loans, mortgage loans, and student loans, for example) and revolving credit such as credit cards can affect your payment history. Since it’s such an important factor, how can you make sure it’s a positive one for you?

•   Making payments on time, every time, is the best way to make sure your payment history is a positive one. Having a regular routine for paying bills is a good way to accomplish this.

•   Automating your payments may help you make at least the minimum payment on credit accounts.

•   Checking your credit report regularly for errors or discrepancies can help catch things that might have a negative effect on your FICO Score if left uncorrected. You can get a free credit report from each of the three credit bureaus once per year at AnnualCreditReport.com.

Amounts Owed (30%)

The amount of debt you owe in relation to the amount of debt available to you is called your credit utilization ratio, and it’s the second-most important factor in the calculation of your FICO Score. Having debt isn’t at issue in this factor, but using most of your available debt is seen as relying on credit to meet your financial obligations.

Credit utilization is based on revolving debt, not installment debt. If you’re keeping your credit card balance well below your credit limit, it’s a good indicator that you’re not overspending. If you have more than one credit card, consider the percentage of available credit you’re using on each of them. If one has a higher credit utilization than the others, it might be a good idea to use that one less often if you’re trying to increase your FICO Score.

Length of Credit History (15%)

This factor’s percentage may not be as high as the previous two, but don’t underestimate its importance to lenders. As with payment history, lenders tend to look at a person’s credit history as predictive of their credit future. If there is no credit history or short credit history, a lender doesn’t have much information on which to base a lending decision.

Since the amount you owe is such an important factor in your FICO Score, you might think that paying off and closing credit accounts would have a positive effect on your score. But that might not be the best strategy.

Revolving accounts like credit cards can be a useful tool in your financial toolbox if used responsibly. A credit card account with a low balance and good payment history that has been part of your credit report for many years can be an indicator that you are able to maintain credit in a responsible manner.

Installment loans like personal loans are meant to be paid off in a certain amount of time. The account will remain on your credit report for 10 years after it’s paid off.

Paying off a personal loan is certainly a positive thing, but paying off a personal loan early could cause the account to stop having that positive effect earlier than it otherwise would.

Recommended: 11 Types of Personal Loans & Their Differences

Credit Mix (10%)

Having multiple types of credit can have a positive effect on your FICO Score. Being responsible with both revolving and installment credit accounts shows lenders that you can successfully manage your debts.

•   Revolving accounts are those that are open-ended, such as a credit card. You can borrow money up to your credit limit, repay it, and borrow it again. As long as you’re conforming to the terms of the credit agreement, the account is likely to have a positive effect on your credit report and, therefore, your FICO Score.

•   Installment accounts are closed-ended. There is a certain amount of credit extended to you and you receive that money in a lump sum. It’s repaid in regular installments over a set period of time. If you need additional funds, you must take out another loan. A personal loan is one example of an installment loan.

Credit mix won’t make or break your ability to qualify for a loan, but having different types of debt indicates to lenders that you’re likely to be a good lending risk.

New Credit (10%)

Though lenders like to see that a person has been extended credit in the past, too much new credit in a short amount of time can be a red flag to lenders.

When you apply for a loan or other type of credit, the lender will typically look at your credit report. This is called a credit inquiry and can be a hard inquiry or a soft inquiry. A soft inquiry may be made by a lender to pre-qualify someone for credit or by a landlord for a lease approval, for example.

During a formal application process, a lender might make a hard inquiry into your credit report, which can affect your credit score. FICO Scores take into account hard inquiries from the last 12 months in your credit score calculation, but a hard inquiry will remain on your credit report for two years.

💡 Quick Tip: Generally, the larger the personal loan, the bigger the risk for the lender — and the higher the interest rate. So one way to lower your interest rate is to try downsizing your loan amount.

FICO Score vs Credit Score

These two terms — FICO Scores and credit scores — are often used interchangeably. More accurately, though, is that a FICO Score is one type of credit score, the one most often used by lenders when making their decisions. There are multiple types of credit scores, each of them using analytics to create a rating that illustrates a person’s creditworthiness.

The Takeaway

Your FICO Score is affected by how you manage your personal finances, whether that’s a personal loan, line of credit, credit card, or other type of credit product. Although it’s not the only credit score lenders use, it is the one used in the majority of lending decisions in the U.S. Personal loans are one financial tool that can be used to add some variety to your credit mix. If managed responsibly with regular, on-time payments, your FICO score could be positively affected by having an installment loan like this in the mix.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.


SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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