Key points
- A full application causes a hard inquiry, which may cost a few points for a short time.
- On-time payments build payment history, the biggest part of your FICO score.
- Using a loan to pay off cards can lower your utilization and help your score.
In this article
What makes up a FICO score
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- New credit: 10%
- Credit mix: 10%
Source: myFICO.
Does a personal loan affect your credit score? Yes, and it touches almost every part of it: new credit, amounts owed, payment history and even the mix of accounts you have.
Here is the journey, stage by stage.
How a personal loan affects your credit score, stage by stage
- Shopping aroundPrequalifying usually uses a soft inquiry, which does not affect your score.
- ApplyingA full application triggers a hard inquiry. It stays on your report for two years, but FICO scores only count inquiries from the last 12 months.
- The first few monthsThe new account slightly lowers your average account age. A small dip is normal.
- Every on-time paymentBuilds positive payment history, the largest factor in your score.
- PayoffThe account closes in good standing. Your score may wiggle slightly, but you keep the positive history.
Where your score comes from
Those are the FICO weightings published by myFICO. A personal loan can help with three of them at once: payment history, amounts owed (if you pay down cards) and credit mix.
Prequalify without hurting your score
SponsoredCommon worries, cleared up
MythApplying with several lenders will wreck my score.
FactPrequalifying usually uses soft checks, which do not count. Only full applications cause hard inquiries, so prequalify first and apply only where approval looks likely.
MythPaying off a loan early hurts my credit.
FactYour score may shift slightly when the account closes, but you save interest. Check for prepayment penalties first.
MythA personal loan counts against my card utilization.
FactIt is an installment loan, separate from revolving credit like cards. Paying cards down with it can actually lower your utilization.
Check rates with a soft credit check
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Keep your score on track
Four habits
Frequently asked questions
How many points does a hard inquiry take off?
Usually only a few points, and the effect fades within a year.
Will paying off a personal loan early hurt my score?
Your score may dip slightly when an account closes, but you save interest. Check for prepayment penalties first.
Does a personal loan count as revolving credit?
No. It is an installment loan, which is separate from revolving credit such as cards.
Can a personal loan help me build credit?
Yes, if the lender reports to the credit bureaus and you pay on time every month.
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