Can A Personal Loan Hurt Your Credit Score?

Do you want to know if a personal loan can hurt your credit score? Maybe you have heard conflicting answers and want to know which is true?

03:30 23 June 2023

Do you want to know if a personal loan can hurt your credit score? Maybe you have heard conflicting answers and want to know which is true? Or are you curious and want to know more? Here at loancorp.co.uk, we are here to give you the answers that you need!

Finding out if a personal loan can hurt your credit score is tricky, especially if you have not taken out a personal loan before. You head online for guidance but are met with page after page of conflicting answers, not knowing who to trust or where to turn. 

And that is where we come in! Today we are here to tell you if a personal loan can hurt your credit score, how it can, and some of the ways it can help your credit score too. Keep reading to become a personal loan expert today.

Can A Personal Loan Hurt Your Credit Score?

Yes, a personal loan can hurt your credit score! A personal loan involves you borrowing money from a lender, like a bank, to spend on whatever you choose. This could be to cover a home repair, start a new business, or cover any surprise bills.

While these loans come with lower interest rates than credit cards, they are not without risks. If you are not careful, they can hurt your credit score. Let’s take a look at how they can hurt your score now.

Creating An Inquiry On Your Credit Report

When you apply for a loan or any type of credit, lenders perform a credit check. Applying for a personal loan will show a hard inquiry on your credit report, negatively affecting your credit score. 

There will be a dip, but this will only last a few months. However, if you apply for multiple loans, the hit will be more extensive and last for longer. It is better to minimise this impact by applying for loans within the span of a week or two.

Puts You In Deeper Debt

A loan puts you in more debt. If you are using your personal loan to pay off higher-interest debt, you need to assess how you got into this debt and make any habitual changes where needed.

If you use the loan to pay off a high-interest credit card, you can’t max the credit card out again and take out another loan to pay it off. You need to ensure that you can pay off your personal loan before looking at other loans!

Additional Fees

 

Personal loans also come with additional fees, like late fees or origination fees. You need to make sure that you can afford these before you take on the loan.

Missing Payments

Missing payments or repaying your loan late not only incurs fees but negatively impacts your credit score too. Ensure that all payments are paid in full and on time to avoid this.

Can A Personal Loan Help Your Credit Score?

There are a few ways that a personal loan can also help your credit score. Let’s take a look at how it can help now.

Build A Better Credit

By taking out a loan and making the repayments in full and on time, it can help to boost your credit score. It also helps to have a variety of different types of credit to enhance your mix, like monthly instalment personal loans and credit cards. Of course, don’t take out any loan you cannot afford to repay!

Build A Payment History

A personal loan can also help to establish a positive payment history that increases your credit score. For this to work, you must pay your loan payments in full and on time every month.

If there is a month where you cannot pay in full, speak to your lender directly to see if there is a payment reduction plan or holiday you can take. Remember there might be fees attached to this.

Reduce Your Credit Utilisation Ratio

As your personal loan will be repaid in monthly instalments, it won’t factor into your credit utilisation ratio. The ratio measures how much of your available revolving credit you are using. Using a personal loan to pay off revolving credit like credit card debt can improve your credit score, as you are replacing revolving debt with an instalment loan.

Final Thoughts

A personal loan can hurt your credit score if you miss the payments, apply for lots of loans, or do not change your financial habits. However, if you use a personal loan to consolidate debt, and make your payments on time and in full, a personal loan can also help your credit score! Just be sure you can make your payments every month and are aware of any fees.