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How Personal Loans Impact Your Credit Score
by
JG Wentworth
•
October 20, 2025
•
7 min
Personal loans can be a helpful tool when used wisely. They can consolidate debt, cover unexpected expenses, or help finance a major purchase. But while they can provide financial flexibility, personal loans also affect your credit score, sometimes positively, sometimes negatively, depending on how you manage them.
Understanding how a personal loan interacts with your credit profile is key to making smart borrowing decisions. Let’s break down what really happens to your credit when you apply for, open, and repay a personal loan.
*This information is provided for educational and informational purposes only. Such information or materials do not constitute and are not intended to provide legal, accounting, or tax advice and should not be relied on in that respect. We suggest that You consult an attorney, accountant, and/or financial advisor to answer any financial or legal questions. Loan eligibility and terms vary by lender and jurisdiction
What Makes Up Your Credit Score
Before looking at how personal loans impact your score, it’s important to understand what actually drives your credit rating. The most commonly used model, the FICO® Score, is based on five main factors:
- Payment History (35%) – Whether you make payments on time.
- Credit Utilization (30%) – How much of your available credit you’re using compared to your limits.
- Length of Credit History (15%) – The age of your accounts and average account age.
- Credit Mix (10%) – The variety of credit types you have, like credit cards, mortgages, and installment loans.
- New Credit Inquiries (10%) – How often you apply for new credit accounts.
Personal loans influence several of these categories, which is why their effect can shift over time.
The Immediate Impact: Applying for a Personal Loan
When you apply for a personal loan, the lender typically performs a hard inquiry on your credit report. A hard inquiry lets the lender assess your creditworthiness but usually causes a temporary dip of a few points in your score.
This impact is minor and short-lived—usually disappearing within a few months—but if you apply for several loans in a short time frame, those inquiries can add up and make you appear riskier to lenders.
If you’re shopping around for the best loan rate, try to complete all applications within a 14–45 day window (depending on the scoring model). That way, multiple inquiries are often grouped and counted as one.
Opening the Loan: Effects on Credit Mix and Average Age
Once approved, the new personal loan will appear on your credit report as a new installment account. This can help or hurt your credit depending on what your profile looked like before:
- Positive impact: If you’ve only had revolving accounts like credit cards, a personal loan adds diversity to your credit mix—an important factor in your score.
- Negative impact: Opening a new account can lower your average account age, which can slightly decrease your score in the short term.
Still, having a healthy mix of credit types shows lenders that you can handle different forms of debt responsibly, which can benefit your score over time.
Apply for a personal loan
Apply for a personal loan
Making Payments: The Long-Term Credit Impact
Your payment behavior is the single most influential factor in your credit score, and this is where a personal loan can help or harm you the most.
1. On-Time Payments Boost Your Score
Every month you make an on-time payment, you’re building a positive history that strengthens your credit profile. Consistent payments signal reliability to lenders and help lift your score gradually.
2. Late or Missed Payments Hurt Significantly
Even one missed payment can have a major negative impact, especially if it’s more than 30 days past due. Late payments stay on your credit report for up to seven years, although their impact lessens over time.
3. Paying Off the Loan in Full Shows Strong Management
Once you’ve paid off your loan, your credit report reflects that you successfully managed an installment loan from start to finish—something scoring models view positively.
How Personal Loans Affect Credit Utilization
Credit utilization usually refers to revolving credit (like credit cards), but installment loans can influence this indirectly.
If you use a personal loan to consolidate credit card debt, your credit utilization ratio may drop significantly. For example:
- Before consolidation: You’re using $8,000 of $10,000 in available credit (80% utilization).
- After consolidation: You use the personal loan to pay off the cards, dropping utilization to nearly 0%.
This change can lead to a noticeable bump in your credit score because utilization is a major scoring factor.
However, this benefit disappears if you start running up your credit card balances again after paying them off. Maintaining discipline is key to preserving that score improvement.
Loan Age and Credit History Length
As you make payments, your personal loan helps build a longer and more stable credit history. Older accounts show lenders that you can manage debt responsibly over time.
Once the loan is paid off, the account typically remains on your credit report for up to 10 years as a “closed account in good standing.” That’s a positive mark that continues to support your credit score even after repayment.
Paying Off the Loan Early: Is It Always Good for Your Credit?
It might sound ideal to pay off your loan as quickly as possible—but doing so isn’t always a major credit boost.
Here’s why:
- Paying off a loan early closes an active account, which could slightly reduce your credit mix and average account age.
- You’ll save on interest, which is financially smart, but the scoring benefit may be minimal or even neutral.
If your goal is to maximize your score rather than save on interest, keeping the loan open for a reasonable period and maintaining perfect payment history might serve you better.
Defaulting or Missing Payments: The Serious Consequences
Failing to repay your personal loan is one of the most damaging things you can do to your credit. When an account becomes delinquent or goes into default, it can lead to:
- A sharp drop in your credit score (often 100+ points)
- A “charge-off” on your credit report
- Potential collections activity and legal action
Defaults stay on your credit report for seven years, making it much harder to qualify for new credit or favorable rates in the future.
Using Personal Loans Strategically to Build Credit
If used wisely, a personal loan can be an effective credit-building tool. Here’s how to make the most of it:
- Borrow only what you need – Avoid unnecessary debt just for the sake of building credit.
- Shop around for the best rate – Compare lenders and prequalify when possible to avoid multiple hard inquiries.
- Set up autopay – Automating payments helps prevent costly late fees and missed payments.
- Monitor your credit report – Watch for errors or reporting delays that could affect your score.
- Use it to consolidate wisely – If consolidating debt, commit to keeping credit card balances low afterward.
When handled responsibly, personal loans can help you reduce high-interest debt, improve your credit mix, and demonstrate reliable payment habits—all of which strengthen your credit profile over time.
The Bottom Line
Personal loans don’t automatically harm or help your credit—it all depends on how you manage them. The process of applying may cause a short-term dip, but consistent on-time payments, responsible borrowing, and low overall debt levels can translate into long-term credit growth.
Think of a personal loan as a financial tool, not a quick fix. Used strategically, it can not only meet an immediate need but also help you build a stronger financial foundation for the future.
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