A personal loan can be a valuable financial tool for paying off debt. From paying an unexpected medical bill to consolidating high-interest debt, there are many possible uses for this type of unsecured loan.
In addition to helping you cover unexpected expenses, personal loans — in addition to a car loan or student loan — can also impact your credit score. Here’s the catch, though – they can have both positive and negative impacts. So, before applying, it is important to consider the potential effects.
So how can a personal loan affect your credit score? We break down the good and bad of how a personal loan can improve your credit or hurt it. To start shopping for a personal loan, to visit Credible to compare rates and lenders.
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How to Use a Personal Loan to Boost Your Credit Score
A personal loan can help you improve your score in several ways:
1. Composition of the loan
Adding a personal loan to your credit report can diversify your credit mix. Your credit score benefits from a good variety of debt types, such as installment loans, credit cards, and mortgages. Your credit mix is only 10% of your credit score, but it can make a difference.
2. Use of credit
Using a personal loan for credit card debt consolidation can improve your FICO score by reducing your use of credit. Your credit usage is the percentage of available credit you are currently using. This factor represents 30% of your credit score and can have a negative impact on it if you use more than 30% of your available credit. By shifting your debt to a personal loan and freeing up space on your credit card, you reduce your usage.
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3. Payment History
The biggest factor affecting your credit score, accounting for 35%, is your payment history. In other words, the credit bureaus want to make sure you can make your payments on time each month. Borrowing a personal loan and making your payments on time without late payments can improve your payment history and increase your credit score – from bad credit to fair credit to good credit – especially if you don’t have many other accounts. on your credit report.
If you are considering applying for a personal loan, be sure to check your credit score beforehand. Not only will you see if your current score will qualify you for the best loan rates, but you’ll also see which areas of your credit report could be improved. You may find that a personal loan could help fill these gaps.
With a credit monitoring service, you can receive instant alerts on late payments, fraudulent activity, credit score changes and more. Check out some of Credible’s partners here.
HOW TO FIND THE BEST PERSONAL LOAN FOR YOUR NEEDS
Will a personal loan hurt my credit?
A personal loan can undoubtedly benefit your credit score, but it’s also important to consider the ways it could hurt your score:
1. Difficult investigation
When you apply for a personal loan – or any debt for that matter – you will have a serious investigation into your credit report, which can negatively impact your score. Hard requests usually only have a minor impact and your score is likely to rebound after a few months. However, the impact can be greater if you open several new debt accounts in a short period of time.
2. Length of credit history
The average length of your credit history is 15% of your credit score, and in general, a longer history is better for your score. Taking on new debt will reduce your average credit term and therefore could lower your credit score.
3. Additional debt
Many people use debt consolidation loans to manage their credit card debt. But if you have a spending problem, opening up space on your credit cards might just lead to more spending. Not only will you hurt your credit score more, but you could find yourself in a situation where you can no longer pay your debts.
WHY USE A PERSONAL LOAN?
What should I look for when getting a personal loan?
When it comes to finding a personal loan, your goal should be to find the best deal and the loan terms that best suit your financial situation. Important factors to consider are:
- Interest rate: Which lender is willing to offer you the lowest rate?
- Loan conditions : Over how many years do you want to repay the loan?
- Costs: Many lenders offer personal loans with no fees, so beware of those with excessive fees.
When researching personal loan options, you can use Credible’s personal loan calculator to determine your estimated monthly payments and make sure they’re within your budget.
DO THESE 5 THINGS BEFORE CHOOSING A PERSONAL LOAN
Taking out a personal loan will most certainly have an impact on your credit. But depending on your situation, it is likely to have both positive and negative effects. When shopping for a personal loan, be sure to consider not only the credit implications, but also how you can find the loan that best suits your personal financial needs.
Ready to find the personal loan that’s right for you? To visit Credible to explore your personal loan options and compare multiple rates and lenders.
You have a financial question, but you don’t know who to contact? Email the Credible Money Expert at [email protected] and your question might be answered by Credible in our Money Expert column.