There is nothing mysterious about personal loans: A loan that is personal affects your score just as similar to any other form of credit. Make timely payments, build credit and avoid making late payments, as this will significantly put a dent in your credit score and be reported to the credit bureaus report.

Your personal loan can be affected at each and every step of the process and here's how.

Considering your personal loan options

Lenders will pre-qualify you for a personalized loan by performing a soft credit check this just means assessing a routine check of your creditworthiness.

This soft inquiry will not impact your credit score and will still allow you to shop and compare which loans consist under the best rates and terms.

Some credit unions & banks will not offer pre-qualification with a soft credit check. If you would like to differentiate between rates, only consider lenders that will offer you the soft check.

Filling out an application for a personal loan will cause a hard credit check, which is more of descriptive evaluation of your credit score history. This inquiry almost always will take 5 points off your current FICO score. A hard credit check inquire will remain on your credit report for up 2 years, but only within the first year will it affect your score.

Obtaining a Loan

Credit accounts especially new ones compile up to 10% of our current FICO score. If you were to open more than 10 new credit accounts in such a short amount of time, obtaining a brand new personalized loan may cause your current credit score to decrease.

A brand new loan could possibly shorten the total average age of your total credit score history. The length of your credit score history contributes to 15 percent of your FICO score, and always remember having a potentially longer credit score history is better than having a short credit history.

If you don’t currently have any installment loans, obtaining a personal loan can enhance your credit mix, which accounts for 10% of your credit score. Effectively managing various types of credit—like installment loans, credit cards, and retail accounts—can positively impact your score.

When it comes to repaying a personal loan, both FICO and VantageScore prioritize payment history as the most critical factor, representing 35% and 41% of your score, respectively. Timely payments can help boost your credit score.

Reputable lenders report repayment activity to at least one of the three major credit bureaus—Equifax, Experian, and TransUnion. Choosing a lender that reports to all three can ensure consistency across your credit reports.

If you miss a payment, being late by a few days might not affect your credit. However, payments that are over 30 days late can be reported to credit bureaus, significantly harming your score.

Establishing a budget that includes all your debt repayments, including personal loans, can help prevent missed payments. Setting up automatic payments can also ensure you pay on time.

Consolidating high-interest credit card debt into a personal loan can enhance your credit by reducing your credit utilization ratio, which is a key factor in determining your overall credit score. Additionally, debt consolidation can simplify your financial situation and lower your monthly payments, allowing you to pay off debt more quickly. credit score.