Ways a Personal Loan Could Affect Your Credit

If you’re thinking about taking out a personal loan, it’s a good idea to know how it may affect your credit score. Responsible borrowing is key to having a healthy credit history. Think of your credit score like a report card. It’s made up of several factors, some more important than others, to predict how likely you are to repay a loan.

Let’s look at different ways a personal loan could impact your credit.

Temporary Credit Score Decrease

Take a deep breath because it should only be for a short time. The decrease is due to a hard credit check by the lender. A lender will make a hard inquiry to review your credit report in order to make a lending decision. It may lower your score temporarily because it indicates to other lenders that you’d like a loan - new debt - which may indicate higher financial risk.

On-Time Payments

It’s very important to make your payments on time every time. Payment history is the top factor that affects credit scores. Paying your bills before or on their due dates shows financial responsibility. Staying consistent can help build a strong credit history.

Missed Payments

It is critical to make your payments on time since payment history is an important factor in your score. Late or missed payments can make a large difference. The more days your payment is late, the more it may damage your credit.

If you’re late with a payment, try to pay it as quickly as possible. Contact your lender or creditor to see if you can work out a payment agreement. And if you miss payments because life gets busy, you could try setting up automatic payments.

Credit Mix

This is a chance for variety in your credit history, but it doesn’t mean to go out and get as many credit types as you can at one time. Though your credit mix accounts for a small percentage of your score, it could make a meaningful impact. The variety shows your ability to manage different kinds of credit in responsible and positive ways, and how you handle your personal loan could impact it.

Keep It Positive

A personal loan can be beneficial in lots of ways. From bridging a financial gap to having the potential to build credit, but it’s all in the way you use it. With responsible borrowing and mindful management, you could set yourself up for a positive credit score experience.