Do Personal Loans Help or Hurt My Credit?

There are hundreds of reasons to take out a personal loan. Whether it’s to make a large purchase, or to cover an unexpected medical expense, it could really change how you look at the matter.

According to the Chamber of Commerce, over 19 million Americans have gone the personal loan route, and it’s worth considering taking that option ourselves.

But we have to know how it will impact our credit. According to my research, this is no easy question to answer. The fact is, a personal loan could either help or hurt your score. We’ll dive into the three main ways a personal loan can impact your score, and then talk about how to make your decision based on those points.

Application Process

The first thing to find out about a personal loan is whether the application will show up as a “hard” or “soft” inquiry. A hard inquiry is almost universally bad for your credit. Even if you have great credit, a hard inquiry could still drop your score by a few points.

A soft inquiry, on the other hand, doesn’t impact your score. 

Reputable lenders will tell you up front whether the application will result in a hard or soft inquiry. If you think your credit score can withstand a slight hit, and you’re reasonably assured you’ll get the loan, then the only thing to consider is whether getting the actual funds is worth it. In the case of a large purchase, you may want to save up for it instead. In emergency situations, of course, you might not have that option.

Current Credit Mix

If you currently have a lot of credit cards, then adding a personal loan could have a huge positive impact on your credit score. This is for three important reasons:

  • Credit Utilization: If you have a lot of credit cards, then every time you use them you’re also driving up your “credit utilization.” This is a percentage of your used credit based on your credit card limits. So if you make a $900 purchase on a credit card with a $1,000 limit, you’re immediately at 90% of your credit utilization, which has a tremendously bad impact on your credit. Personal loans, on the other hand, have no impact on your credit utilization, which means you can use those funds with no impact on your credit score.
  • Better Credit Mix: The Credit Bureaus are tricky. No one knows their exact formula, but we can deduce some of their process based on effect. And it has been demonstrated that having multiple types of reporting to your score can improve it. For instance, if you have a car loan, credit cards, and a personal loan on your credit score, it could be higher than having only credit cards.
  • Debt Consolidation: Taking the first two points together, we can arrive at one of the biggest reasons people take out a personal loan: debt consolidation. If you take a personal loan and use it to completely pay off your credit cards, you could see a dramatic increase in your credit score. That’s because you’re paying down that credit utilization, and you’re contributing to a better credit mix.


The last thing to consider when looking at whether a personal loan will hurt or help your credit is the payment schedule. You need to take an honest, thorough look at your income and expenses and decide if you can make the payments on a personal loan.

If you cannot keep up with the payments, the Credit Bureaus will hear about it, and missed payments will hurt your score. And a default will really hurt it.

Bottom Line

In the end, if you’re responsible about your payments, and you use the personal loan to pay off higher interest credit cards, then the personal loan can really boost your credit. On the other hand, if you don’t get the loan, and suffer a hard inquiry, that will hurt your score.

Furthermore, if you’re unable to keep up with the payments, and don’t use the loan to drive down your other credit utilization, then a personal loan will hurt your score.


Where Can I Learn More About Personal Loans?

I actually have several in-depth articles about personal loans. I’d start with there and check out the other articles.

How Do I Know If It’s A Hard Inquiry?

It’s a safe bet that a substantial personal loan without collateral is going to result in a hard inquiry. Also, every good lender will tell you up front during the application process if it will be a hard inquiry.

How Can I Figure Out If I Can Afford a Loan Before Applying?

That’s a great question. I actually found a great calculator here. It’s free, and using it won’t affect your credit at all. Using it, you can find out what your monthly payments on certain loans will be before even applying for them.

About the author Greg Lorenzo

Greg is a financial expert who has been advising his audience on loans for over 10 years. He has a wealth of knowledge and experience in the area, and he is passionate about helping people get the best possible deal on their loans. Greg is an expert in negotiating loans, and he has a proven track record of getting his clients the best possible terms. He is also a strong advocate for financial literacy, and he regularly gives workshops and seminars on the topic.

Leave a Reply

Your email address will not be published. Required fields are marked

{"email":"Email address invalid","url":"Website address invalid","required":"Required field missing"}