By Dan Miller, WCI Contributor

Your credit score is one of your most important (intangible) assets, and one of the best things that you can do for your financial health is to make sure to maintain your credit score and keep it as high as possible. There are many things that go into how your credit score is determined, but two of the most important are how regularly you pay your bills and the total amount of your credit that you are using (also known as your utilization ratio). Taking out a personal loan can make sense in many instances, but before you do, you'll want to make sure you understand how personal loans impact your credit score.


How Can a Personal Loan Impact Your Credit Score?

A personal loan can impact your credit score in a couple of different ways—some positive and some negative. Here's a quick look at a few of the ways that a personal loan can impact your credit score:


How Can a Personal Loan Help Your Credit Score?

One of the biggest ways that a personal loan can help your credit score is by showing a history of making on-time payments. Your payment history is the biggest factor that makes up your credit score, and the more accounts you have showing that you reliably pay your obligations, the better. 

Another way that getting a personal loan can help your credit score is by adding to your overall credit mix. Another positive factor toward your credit score is having different KINDS of credit. A good mix of credit cards, mortgages, loans, and other payment accounts helps your credit score, and adding a personal loan to the mix may increase it as well. 


How Can a Personal Loan Hurt Your Credit Score?

There are also two main ways that taking out a personal loan might hurt your credit score. The first is that nearly every time someone accesses your credit report (known as a “hard” inquiry), your score usually drops by a few points. This is because having lots of inquiries on your credit report (especially in a short period of time) is a negative indicator to your credit score. If you're wondering how much your credit score drops when you get a loan, the good news is that it usually only drops your score by a few points and only temporarily (for 2-3 months).

Another way that taking out a personal loan can hurt your credit score is if you don't reliably make your payments each and every month. As we discussed earlier, your payment history is the biggest factor that makes up your credit score. If you open up a new personal loan account and then don't pay on time, it can have a large negative impact on your credit score.

More information here:

10 Benefits of Keeping Your Credit Score in Good Health


What Credit Score Is Needed for a Personal Loan?

There are many different banks, lending platforms, and credit unions that offer personal loans, and each one has their own criteria for who they will loan to and at what interest rate. We maintain a list of the best personal loan companies for doctors, and each one has different standards. Some lenders may only loan you money if your credit score is at a certain level. Others may have different loan platforms for different credit scores. Generally, the better your credit score is, the lower the interest rate and the more favorable your personal loan terms will be. Check with a variety of different lenders to find one that works for you.


Does Consolidating Debt with a Personal Loan Help Your Credit Score?

There are many different reasons to take out a personal loan, but one common reason is to consolidate debts. If you use a personal loan as a way to consolidate your debts, it can have a variety of different impacts on your credit score. But if it makes it easier for you to pay down (and pay off!) your debts, it will generally be a good thing. 

If you find that your personal loan is helping you pay down your debt and you've reached a point where you have enough in savings to pay it off, you might wonder if it is bad to pay off a personal loan early? The exact calculations to decide whether it's a good decision to pay off your personal loan before it's due can be complicated, so you may want to consult with trusted friends, family, or advisors. But generally, even if paying your loan off early gives a slight negative hit on your credit, it may be worth it to save on the interest from the loan.

personal loan credit score

More information here:

Medical School Student Loans Debt Consolidation


The Bottom Line

Like most types of loans or debt obligations, personal loans can have an impact on your credit score. There are a few different factors that make up your credit score, but one of the biggest is your payment history. In that sense, how reliably you make payments on your personal loan will have the biggest impact, either positively or negatively. Applying for a personal loan may also result in a small, temporary hit to your credit score as your lender(s) pull your credit report, but you may also see a positive boost to your score as your personal loan contributes to a more robust credit mix. Consider all the potential positives and negatives before deciding to take out a personal loan.


Have more questions about personal loans and if they're the best option for you? Let us introduce you to the best physician personal loan companies in the business.


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