How Does A Personal Loan Affect Credit Score

Personal loans affect your credit score by either increasing or decreasing it depending on whether you make your payments on time. Making on-time payments to a lender that reports to the credit bureaus can improve your credit score over time. That being said, late payments or failing to pay altogether can decrease your score. 

This only applies if the lender in question is reporting your payments to any of the credit bureaus. These are a handful of companies that monitor your borrowing and payment history, and give you a score based on how trustworthy of a borrower you are. It’s important to find out whether your lender is reporting your payments to the credit bureaus. But it’s even more important to always make payments on time, regardless of whether they’re being reported. 

What Exactly Is a Credit Score?

This is a three-digit number that tells lenders, banks, credit unions, and other financial institutions how trustworthy you are when you borrow money. Your score is calculated by a few different companies that track your history of borrowing, credit usage, and payments. The three main companies are Equifax, TransUnion, and Experian. 

These companies keep a record of how you use credit, and whether you pay your bills and loans on time. They compile this information into something called your “credit report.” Usually, items on your credit report will stay there for up to seven years. This is why it’s so important to always pay your bills on time. 

Depending on the company that’s calculating your score, it will usually range from 300–850, with a higher score being better. Here’s the breakdown of how lenders see your trustworthiness based on where you fall on the scale:

  • 300–579: Very poor credit
  • 580–669: Fair credit
  • 670–739: Good credit
  • 740–799: Very good credit
  • 800–850: Exceptional credit

It’s completely normal for your credit score to fluctuate a bit over the course of your life. But significant drops usually only occur from missed payments, bankruptcies, excessive debt, and other poor financial habits. Keep these habits in check to keep your credit score strong.