A:

Taking out a personal loan is not bad for your credit score in and of itself. However, there are several factors that come with taking out a new loan that could affect your overall credit score.

What Factors Into Your Credit Score

To understand how taking out a personal loan affects your credit score, you must first understand how the score is calculated. Roughly 35% of your overall credit score is based on your payment history. Thirty percent of your score is based on the total amount of debt you owe. Ten percent of the score is based on the number of credit lines (which include credit cards) that you have opened recently.

The last two factors are initially impacted by a new personal loan. Your total debt increases overall, and a new line of credit is opened. The credit agencies take note of this activity and could possibly lower your credit score based on the new loan. However, your overall credit history has more impact on your credit score than a single new loan. If you have a long history of managing debt and making timely payments, the effect on your credit score from a new loan is likely to be lessened.

Keeping a New Personal Loan From Damaging Your Credit Score

The easiest and best way to keep a personal loan from negatively affecting your credit score is to continue making payments on time and within the terms of the loan agreement. A personal loan that you pay off in a timely fashion can actually have a positive effect on your credit score; it demonstrates that you can handle debt responsibly.

RELATED FAQS
  1. Can a Best Buy credit card help you build credit?

    Learn about how using a Best Buy credit card responsibly can lead to a higher credit score and lower interest rates on mortgages ... Read Answer >>
Related Articles
  1. Personal Finance

    How Bad Is My Credit Score?

    Find out how to assess your credit score to determine if it's too low or sitting at a comfortable level. Learn how to improve your creditworthiness.
  2. Managing Wealth

    Can You Hit A Perfect Credit Score?

    Everyone wants a great credit score, but few know exactly how to achieve perfection. Find out how your credit score is kept and what it takes to reach a perfect 850 rating.
  3. Personal Finance

    4 Habits That Damage Your Credit Score

    Many common money habits can affect your credit score negatively without you even knowing it.
  4. Personal Finance

    Do You Understand Your Credit Score?

    Most Americans don't really understand their credit scores. Find out what you need to know.
  5. Personal Finance

    Is Your Credit Score at 850? It Can Be!

    Use these tips to increase your credit score and your ability to get low interest rates on loans.
  6. Personal Finance

    How Your Credit Score Compares to the Average American's

    While only a small percentage of Americans have terrible credit scores, a whopping 30% have poor or bad credit, according to the Consumer Financial Protection Bureau.
  7. Personal Finance

    5 Extreme Ways To Raise Your Credit Score

    These methods are legal and legitimate - but are they worth it?
  8. Managing Wealth

    5 Common Misconceptions About Your Credit Report

    Your credit report is one of the most important factors in determining your ability to get loans and new credit and has a major influence on your rates.
  9. Investing

    How To Boost Your Credit Score To Save Thousands

    One of the first steps you should follow before buying a home is to boost your credit score. And how do you do that? Here, we tell you how.
  10. Personal Finance

    5 Bad Moves That Will Torpedo Your Credit Score

    Your credit score can change if you aren't careful. From missing payments to carrying high balances, there are many ways to torpedo your credit score.
RELATED TERMS
  1. Credit Score

    A credit score is a number ranging from 300-850 that depicts ...
  2. Bad Credit

    A qualification of an individual's credit history that indicates ...
  3. FICO Score

    A FICO score is a type of credit score that makes up a substantial ...
  4. FAKO Score

    A FAKO score is a derogatory term for a credit score that is ...
  5. Consumer Credit File

    A consumer credit file contains data about a consumer’s past ...
  6. Debt Consolidation

    Debt consolidation is the act of combining several loans or liabilities ...
Trading Center