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A personal loan can both improve and hurt your credit score, depending on whether you make repayments on time.
Taking out a personal loan can improve your credit in three ways:
A personal loan can also have a negative effect on your credit score in two ways:
A personal loan can have an impact on your credit score as soon as you start looking for a lender to the day you make your final repayment.
Here are four times when it can affect your credit:
In some cases, checking the rates and terms on a personal loan involves a hard credit check, which hurts that new credit portion of your credit score. Most lenders conduct a hard credit check when you submit your application.
This drop in your credit score generally only lasts a few months, but can spell less favorable rates and terms if you decide to apply with another lender.
While it’s hard to avoid at least one credit inquiry, there are two ways to minimize the impact of your application. First, prequalify with lenders that offer a risk-free quote based on a soft credit check. If that’s not an option, try to submit applications within the same 30-day period — most credit bureaus see this as rate-shopping and only count it as one credit inquiry.
Making on-time repayments generally has the largest positive impact on your credit score. That’s because repayments make up the largest percentage of your credit score than any other factor. It also lengthens your history of on-time repayments, which is the third most important factor contributing to your credit score.
It depends on how closely your monitor your bank account. Autopay is designed to ensure your repayments go through on time if you always have enough money in your account.
But you could accidentally miss a repayment if you move money around and forget that your loan payment is due — or otherwise have a cashflow problem. You can avoid this by remembering your due date and being mindful of your account balance.
Missing even one repayment can have a negative impact on your credit score if you miss your lender’s grace period. Most lenders allow around 15 days before they report late repayments, so you have some breathing room. But once it hits that 15-day mark, your credit score will drop and you’ll also likely be charged a late fee.
Contact your lender if you think you’re going to be late on a repayment before it’s due. It might be willing to adjust your terms or move your due date so you can keep your record clean.
Consolidating debt can have a similar impact on your credit as taking out a new personal loan. It can give you lower rates and terms that better fit your budget.
If you have credit card debt, it can also help you lower your credit utilization ratio by getting you on schedule to make headway on your balance. Just keep that credit account open since closing credit cards lowers the amount of credit available to you.
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Generally no. While taking out a personal loan might offer an opportunity to build your credit, it’s difficult to qualify for competitive rates and terms if you don’t already have an established positive credit history. Instead, you might want to use products that are designed to help improve your credit, like a credit-builder loan or secured credit card.
A personal loan can have an overall positive impact on your credit score if you pay it off on time. But it can lower your score if you miss a repayment or go into default. You can learn more about how they work with our guide to personal loans.
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