Taking out a personal loan is not a black mark on your credit rating in and of itself. However, it may affect your overall credit score, making it more difficult for you to obtain additional credit before that new loan is paid back.
On the other hand, paying off that personal loan in full should boost your overall score.
- Your overall credit rating could be lowered temporarily when you take a personal loan because you have acquired additional debt.
- Your credit rating should go back up as you repay the loan on time.
- In the short term, you may not be able to get another loan or open another credit card.
What Factors Into Your Credit Score
To understand how taking out a personal loan affects your credit score, you must know how the score is calculated. The exact percentages may vary among the three major credit rating agencies, but these are the five factors in the calculation:
- About 35% is based on your payment history
- 30% is based on the total amount of your outstanding debt
- 15% is based on the length of your credit history
- 10% is based on the number of credit lines that you have open (including credit cards)
- 10% is based on any new debt or newly-opened line of credit
As you can see, obtaining a new personal loan could affect your credit rating. Your outstanding debt has increased, and you have acquired additional debt.
The percentage of consumers who fall in the top credit rating range of 600 to 750.
The credit agencies take note of new financial activity. If, for example, you tried to arrange for a new car loan shortly after taking out a personal loan, your application for a car loan might be rejected on the basis that you already have as much debt as you can handle.
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.
Boosting Your Credit Score
The easiest and best way to keep a personal loan from lowering your credit score is to make your payments on time and within the terms of the loan agreement. A personal loan that you pay off in a timely fashion can have a positive effect on your credit score, as it demonstrates that you can handle debt responsibly.
Perversely, people who are most averse to taking on debt could have lousy credit ratings. A person who never acquires debt and pays it off in installments has no payment history.
What's a Good Score?
Credit scores range between 300 and 850. According to one of the credit agencies, Experian, most consumers rate a credit score between 600 and 750. A score of 300 to 579 is "very poor." A score of 580 to 669 is "fair," while a score of 670 to 739 is "good" and 740 to 799 is "very good." Above 800 is rated "exceptional." Only 21% of all consumers get that top rating.