How Do Personal Loans Affect My Credit?

It can be difficult to know whether to apply for a personal loan. You may need more funds, but you may also be concerned about how a personal loan may impact your short- and long-term financial goals. To help you better understand whether a personal loan will affect your credit score and if it can help improve your score, make sure to read on. 
 

Does Applying for A Personal Loan Affect Your Credit Score? 

The simple answer here is "yes." Applying for a personal loan can affect your credit score as one of your score components is the number of new accounts and recent credit checks. This factor makes up about 10% of your credit score, so it's not the largest consideration, but it is an important one. 
 

The reason lending companies care about new credit accounts or credit checks is it may affect your ability to pay back your debt. If you’re seen to be taking on considerable debt in a brief period, this may be an indicator that you will soon have trouble making your payments on time, if at all. 

Can a Personal Loan Improve Your Credit Score? 

While there may be negative short-term consequences of applying for a personal loan, it can also have positive long-term effects. The best case to make to lending companies that you can take on debt and make timely payments is to have a history of doing so. Furthermore, on-time payment history makes up 35% of your credit score, the largest component of your FICO rating. So, a new personal loan that leads to months or years of on-time payments can help you down the road. 

What Credit Score Do You Need to Be Approved for a Personal Loan? 

Every lender has different ways to decide creditworthiness. Most use your FICO score, though, as the leading indicator. 

Lenders view your FICO score as belonging to one of five tiers: 

• Poor – A score of under 580 makes it nearly impossible for you to be approved for a loan  

• Fair – A score between 580 and 669 makes it difficult, but possible, for you to be approved. You’ll probably need a lengthy employment history, high annual income, and/or large deposit account balances to be approved.  

• Good – A score between 670 and 739 makes it likely you’ll be approved for a loan, albeit not one with a high balance or low-interest rate.  

• Very good – A score between 740 and 799 proves your creditworthiness well.  

• Exceptional – Any score of 800 or above makes you an ideal person to receive a personal loan.  
   

What Else? 

While a personal loan may cause a short-term dip in your credit score, on-time payments can help your score rise in the long-term. As always, it’s essential to know what you’re getting into before applying.