Personal Loans and Your Credit Score
A personal loan dings your score at application, then usually helps it for years. Here is the full timeline, including the consolidation bounce.
Expect a small temporary dip from the hard inquiry, then steady gains from on-time payments and improved credit mix. Consolidating card debt often lifts scores 20-60 points by cutting utilization. One 30-day late payment can erase years of gains.
The application dip
The hard inquiry from applying typically costs 5 to 10 points for a few months. Multiple applications within the rate-shopping window count as one inquiry, so shop quickly rather than spacing applications across months.
Opening the loan also lowers your average account age, a minor factor. Both effects fade within a year and are dwarfed by what comes next if you pay on time.
The payment history build
Payment history is 35 percent of your score, the largest factor. Every on-time monthly payment adds positive history; 36 months of them is a meaningful track record, especially for thin files.
Set up autopay on day one. A single 30-day late payment can cost 60 to 100 points and linger for seven years, erasing the entire benefit of the loan.
The consolidation bounce
Using the loan to pay off credit cards attacks utilization, 30 percent of your score. Moving $12,000 off cards with $15,000 in limits takes utilization from 80 percent to near zero, which commonly lifts scores 20 to 60 points within a cycle or two.
Keep the paid-off cards open: closing them cuts your total available credit and can spike utilization back up. Use them lightly and pay in full.
Credit mix and account diversity
Credit mix is 10 percent of the score. Adding an installment loan to a file of only credit cards improves the mix, which helps thin or young files most.
This is a small effect, not a reason to borrow. Never take a loan to improve your mix; let the mix improve as a side effect of borrowing you actually needed.
What destroys the benefit
Late payments, as noted, are catastrophic. So is re-filling the credit cards after consolidation: you end with the loan payment plus new card minimums, higher utilization than before, and a worse score.
The behavioral rule is simple: the loan consolidates the past, but only a budget fixes the future. Automate the loan payment and cut up, do not close, the cards.
Skip the arithmetic
Model the loan you are considering with the free personal loan calculator.
Loans and credit scores
Will a personal loan raise my credit score?
Usually yes, over months. The hard inquiry dips the score slightly at first, but on-time payments build the largest scoring factor, payment history, and using the loan to pay off cards can cut utilization dramatically, often lifting scores within one or two billing cycles.
How many points does a personal loan inquiry cost?
A hard inquiry usually costs 5 to 10 points and its impact fades within a few months, disappearing from scoring consideration after a year. Multiple loan inquiries within the 14 to 45 day rate-shopping window are treated as one.
Can a personal loan hurt my credit?
Yes. Late payments damage scores severely and stay on reports for seven years. The subtler trap is behavioral: consolidating cards and then running them back up leaves you with more debt and worse utilization than before the loan.