When you're ready to apply for a personal loan, the lender will perform a more detailed credit check, known as “strong credit extraction.” This is recorded on your credit report as a credit inquiry, and because taking out loans is a somewhat risky activity, your credit score usually drops a few points. Additionally, if you use a personal loan to pay off credit card debt but start charging on your credit cards again, you'll accumulate more debt. This is likely to lower your credit rating in the short term. It's helpful to know the different ways that personal loans affect your credit score so you don't be surprised if your score is going in a different direction than you intended.
For example, you can apply for a personal loan to start a new business, pay medical bills, or finance an expensive but urgent repair of your home (such as a new roof in the middle of the rainy season). Before you apply, just keep in mind that taking a personal loan with bad credit means you can pay higher interest rates and some fees. To understand how getting a personal loan affects your credit rating, you need to know how the rating is calculated. A personal loan does not take into account the use of your credit because it is a form of installment credit, not revolving credit.
A personal loan can be an affordable way to finance a large expense, cover an emergency, or even consolidate a debt. Qualified customers using Rocket Loans will see 36- or 60-month term loan options, and the APR ranges from a low of 5.970% (discounted auto-payment rate) to a maximum of 29.99% (non-discounted auto-payment rate) depending on their credit profile. If you have problems with high-interest credit card debt or need cash for an unexpected expense or a large purchase, you may be considering applying for a personal loan. To find out what impact your personal loan is having on your credit score, you can review your credit report regularly. However, the habits that led you to go into debt in the first place may make a personal loan feel more like an additional financial burden.
On the other hand, the lower your credit score, the less likely you are to be considered creditworthy and approved for a low-interest personal loan. Another way that a personal loan could damage your credit, at least temporarily, is when you finish paying it. Having cash on hand to handle a financial emergency can be a lifesaver, but a personal loan can affect your credit score both positively and negatively. So if you're already living on a tight budget, taking out a personal loan to finance something like a trip to Fiji could cause you problems. If you do, you will return to where you started, but with more debt in the form of a personal loan.