Will applying for a personal loan affect my credit score?
Applying for a personal loan affects your credit score, but the impact at each stage is different. Here’s what actually happens.
Applying for a personal loan may affects your credit score differently at each stage of the process: from the initial rate check through to full repayment. A personal loan can affect a credit score positively or negatively over time, depending upon several factors.
Personal loans affect your credit score during the borrowing process, but not all in the same way or the same direction. Understanding which effects are positive, which are negative, and how significant each one is helps you make a more informed decision and time your application strategically.
The five FICO score factors, and where a personal loan touches them
FICO scores are calculated from five weighted factors:
Payment history: 35%
Amounts owed/credit utilization: 30%
Length of credit history: 15%
Credit mix: 10%
New credit / recent inquiries: 10%
A personal loan affects all five. Here’s a detailed overview.
Stage 1: Checking your rate
The first step in applying for a personal loan is checking your rate. With many lenders, such as Happen Bank, this entails only a soft inquiry: a credit check that doesn’t appear on your credit report and has no effect on your credit score.1
Checking your rate with multiple lenders helps you compare offers before committing to a full application.
Stage 2: Submitting a full application
A formal application usually triggers a hard inquiry with a few exceptions depending on the lender. Generally, one additional credit inquiry will take less than five points off a FICO score. Hard inquiries can stay on your credit report for up to two years, but they only affect FICO scores for a year.
The rate-shopping window. FICO groups multiple hard inquiries made within a short time frame—14 to 45 days—into one inquiry. However, this depends on the score model used by the lender. This means you can formally apply to more than one lender within that window and have it count as a single inquiry on your score. If you want to apply to multiple lenders, it’s best to do so within 14 days to ensure the rate-shopping protection applies.
Stage 3: Opening the loan: how it affects your credit score
When a personal loan is issued, it affects your credit across several categories:
Credit mix may increase slightly. If you previously had only credit cards and a personal loan is the first installment loan in your name, a new personal loan can add to your credit mix. Credit mix accounts for 10% of your FICO score.
Average account age can dip temporarily. Adding a new loan to your credit profile means your average account age can decrease. The length of credit history makes up 15% of your credit scores, so this usually does not have as large an impact as a missed payment or additional debt.
Amounts owed increases initially. Added debt from a personal loan contributes to the “amounts owed” category, which accounts for 30% of your FICO score. Merely owing money doesn’t mean you’re considered a risky borrower but high balances can negatively impact your credit.
Credit utilization can drop significantly if used for debt consolidation. If you use the personal loan to pay off credit card balances, your credit utilization ratio falls. A debt consolidation loan can reduce your credit utilization, which is an important scoring factor—your utilization will decrease to 0% on the cards whose balances you transfer, which can have a positive effect on your credit score.
Stage 4: Managing the loan over time
Payment history accounts for the largest share (35%)of your FICO score. Each on-time payment on the personal loan adds to your payment history record: a cumulative benefit that builds over the full term.
A missed payment on a personal loan is recorded in your payment history: the largest FICO scoring factor at 35%. Consistent on-time payments build credit history, while missed payments can lower scores.
Does paying off a personal loan early hurt your credit score?
Not necessarily. Paying off a personal loan early removes an installment account from your credit mix, which can have a very minor effect on average account age and credit mix. Your credit score is typically more influenced by how you manage the loan while it’s open than by when you close it.
Happen Bank charges no prepayment penalty.
Summing up
A personal loan can have a small negative effect at the moment of application: the hard inquiry and the dip in average account age. It can create a modest positive effect at opening—the addition of an installment account to your credit mix. And it can create a large, sustained positive effect over time through on-time payment history and, if the loan is used for consolidation, through the utilization drop that follows paying off revolving balances.
Check your rate in seconds with Happen Bank¹
Frequently asked questions
How many points does a personal loan application take off your credit score?
For most people, one additional credit inquiry will take less than five points off their FICO scores. The exact amount varies based on the depth and length of your credit history. Hard inquiries stay on your report for up to two years but only affect your FICO score for a year.
Can I apply to multiple lenders without hurting my credit score?
Yes, within limits. FICO treats multiple inquiries submitted within a 14-to-45-day window as a single inquiry. Applying with several lenders in rapid succession within that window limits the credit score impact to one hard inquiry.
Does paying off a personal loan early hurt your credit score?
Generally no. Paying off a personal loan early closes the account, which can have a minor effect on your credit mix and average account age. The actual impact depends on your overall credit profile.
Disclosures
Checking a rate through us generates a soft credit inquiry on a person’s credit report, which is visible only to that person. A hard credit inquiry, which is visible to that person and others, and which may affect that person’s credit score, only appears on the person’s credit report if and when a loan is issued to the person
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