While a personal loan can be a great way to finance a big purchase or even consolidate debt, it’s important to remember that it can both have a positive and negative impact on your credit score, depending on your financial situation and how well you manage it.

In this article, we’ll discuss the factors that go into determining your credit score, and how taking out a personal loan can affect it.

How Your Credit Score Is Determined

Your credit score is a three-digit number that ranges from 300 to 850, and it’s what banks and other types of lender uses to determine your creditworthiness as a borrower when you apply for a loan. Simply put, the lower your credit score, the riskier you appear as a borrower.

Unfortunately, you may have multiple credit scores, each calculated using a different algorithm. Generally, however, your FICO credit score, which is the most common credit score lenders use, is determined by a variety of factors, including:

• Payment history. This accounts for 35% of your credit score and is based on whether you’ve made your payments on time.

• Credit utilization. This accounts for 30% of your credit score and is based on how much of your available credit you’re using.

• Length of credit history. This accounts for 15% of your credit score and is based on how long you’ve had credit accounts.

• Credit mix. This accounts for 10% of your credit score and is based on the different types of credit accounts you have (such as credit cards, personal loans, mortgages, etc.).

• New credit. This accounts for 10% of your credit score and is based on the number of new credit accounts you’ve recently opened.

How A Personal Loan Can Affect Your Credit Score

Taking out a personal loan can affect your credit score in several ways, both positive and negative.

Positive:

• If you use the loan to consolidate credit card debt and lower your credit utilization, it could help improve your credit score.

• A personal loan with a fixed monthly payment and set payback term can help you manage your finances. If you pay the loan on time it can have a positive impact on your credit score.

Negative:

• If you take out a personal loan and your credit utilization goes up, it could have a negative impact on your credit score.

• Missing payments or making late payments could also lead to a decrease in your credit score.

Overall, whether taking out a personal loan will have a positive or negative impact on your credit score depends on how you use it and how well you manage it.

How To Keep Your Credit Score Strong

If you’re considering taking out a personal loan, there are a few things you can do to minimize the potential negative impact on your credit score:

• Keep your credit utilization low. If you’re consolidating debt with a personal loan, make sure you’re not increasing your overall credit utilization.

• Make your payments on time. Late or missed payments can have a major negative impact on your credit score.

• Try to maintain a healthy mix of credit. Having a variety of different types of credit accounts (such as credit cards, personal loans, and mortgages) can help improve your credit score.

By understanding how taking out a personal loan can affect your credit score, and taking steps to mitigate the potential negative impact, you can make an informed decision about whether a personal loan is the right choice for you and your financial goals.

The Bottom Line

A personal Loan can be a great way to manage your finances and help improve your credit score. However, it can have a negative effect on your credit score if not used and managed properly. This is where consulting a credit counselor or financial expert can help decide if taking out a personal loan is right for your current financial and credit situation.

Luckily, your credit score isn’t written in stone and can always be improved. One of the ways to do this is with credit restoration, the process of removing negative information from your credit report. Call us at 888-799-7267 to schedule a Free Credit Consultation.