When you apply for a personal loan, the lender performs a more thorough evaluation of your credit history, known as a “hard credit inquiry”. This is recorded on your credit report as a credit inquiry, and because taking out loans is a somewhat risky activity, your credit score generally drops a few points accordingly. A hard credit inquiry can have a negative effect on your credit score and stay on your credit report for up to two years. However, the extent to which your scores are affected may depend on your specific financial situation. But it's not all bad news.
A personal loan can also help you build your credit score in many ways. For example, 68% of customers in one study found that their credit scores increased by 20 points or more within three months of consolidating their debt. Additionally, personal loans are installment loans, meaning they don't take into account the use of your credit like revolving credit does. This means that if you make all of your payments on time, you can improve your credit score. Before you apply for a personal loan, it's important to understand the potential impacts it can have on your credit score.
Applying for a personal loan shortly after applying for a new credit card could cause an even bigger drop in your credit rating, as a hard inquiry would be conducted for both applications. You should only apply for a personal loan when you really need it for something important, such as covering a large expense or consolidating credit card debt. If you qualify for a personal loan with bad credit, you may have to pay a higher interest rate. To find out what impact your personal loan is having on your credit score, you can review your credit report regularly. To understand how getting a personal loan affects your credit rating, you need to know how the rating is calculated. But remember that it's not just the loan itself, but the way you handle it that can make a difference.
A personal loan will have a slight impact on your credit score in the short term, but making payments on time will boost you again and can help you build your credit. Overall, new credit applications account for approximately 10% of their credit ratings. While personal loans can help your credit score in many ways, they can also negatively affect your credit in certain situations. Before you get a loan to build credit, think carefully about these risk factors and make sure that applying for a loan is the right choice for you.