Skip to content
active
How a Personal Loan Affects Your Credit Score - The Pros and Cons

How a Personal Loan Affects Your Credit Score - The Pros and Cons

How a Personal Loan Affects Your Credit Score - The Pros and Cons

Taking out a personal loan is often necessary to help cover large expenses or consolidate high-interest debt. However, the impact a personal loan can have on your credit score is an important factor to consider. Your credit score plays a crucial role in your ability to access credit and the interest rates you will pay.

In this blog post, we will discuss how a personal loan affects your credit score and the steps you can take to minimize any negative effects.

Pros and Cons of Availing a Personal Loan:

Here are some of the pros and cons that taking out a personal loan affects credit score:

Pros:

1. Better Credit Mix

Having both loans and credit cards in your credit portfolio demonstrates to lending companies that you can responsibly manage different types of credit. This diversity of credit types can improve your credit score, as credit scoring models like to see you handle and be responsible with credit.

2. On-Time Payments

Making consistent and timely payments every month over the entire repayment period of the personal loan builds a strong positive payment history. Payment history is the most important factor in your credit score. A good payment history on a personal loan can significantly improve this major component of your score.

3.    Better Credit Utilization

Using funds from a personal loan to consolidate and pay off high credit card balances may lower your overall revolving credit utilization ratio. Lower credit card balances compared to limits can improve your utilization metric and help improve your credit score. This depends on the overall impact on your total debt.

Cons:

1. Hard Credit Inquiries

Every application for a new credit account triggers a hard inquiry on your credit report, including personal loan applications. These inquiries can affect your credit score slightly, usually between 2-5 points per inquiry. Too many inquiries in a short period of time can indicate a higher risk to loan providers.

2. Increased Overall Debt

Taking out a new personal loan increases your total outstanding debt across all accounts. Loan providers view higher total debt as a risk factor, and it can negatively affect your credit score.

3. Missed Payments

Failure to make payments on time on the new personal loan can severely damage your credit profile. Payment history is the single biggest factor that affects your credit score. Even one missed payment can lower a great score.

Steps to Minimize Credit Score Damage

While qualifying for a personal loan will require a credit check and will impact your score to some degree, there are steps you can take to minimize the potential downside:

  • Only Apply for Affordable Loan Amounts: Applying for a loan you can’t comfortably handle could negatively impact your credit utilization and ability to make timely payments. Know your budget and stay within your means.
  • Maintain Low Credit Utilization Going Forward: After you take out the loan, keep balances on credit cards and other revolving accounts low to neutralize the impact of the new loan on your overall utilization.
  • Make All Payments on Time: Payment history is the biggest factor in your credit score. Be sure to always make at least the minimum payment on your credit card and preferably pay more than the minimum whenever possible. Set up autopay or payment reminders to avoid missed payments.
  • Limit Credit Applications: Each credit application can hurt your credit, so avoid applying for multiple loans within a short timeframe. Compare rates and terms and apply with a loan provider most likely to approve your loan.

The Bottom Line

Taking a personal loan to finance your individual needs can significantly affect your credit score. While the impact can be both positive and negative, your responsible credit behavior can ensure that it is only positive.

FAQs

1. Is credit score checked for a personal loan?

A credit score is a significant factor in determining your qualification for a personal loan. It basically shows your creditworthiness to the financial institutions. 

2. How do I reduce the negative impact of taking a personal loan on my credit score?

You can reduce the negative impact of taking a personal loan by paying your personal loan Equated Monthly Instalments (EMIs) on time. You can select the auto-pay option to pay all your EMIs on time. 

3. How can I check my credit score? 

With Shriram Finance, you can calculate your credit score for free. All you need is your 10-digit mobile phone number (active) and a few basic details like your PAN card, DOB, E-mail ID and PIN code. 

4. What can I use a personal loan for? 

Personal loans are flexible, unsecured loans that can be used to finance a variety of expenses and life events over time. Common uses for personal loans include consolidating high-interest debt, financing major purchases and home renovations, covering emergency costs, paying for weddings and other life events, relocating, taking vacations, and more.

Get a personal loan at low interest rates

Related articles

Credit Card vs Personal Loan - Know the Difference

Credit Card vs Personal Loan - Know the Difference

Credit Card vs Personal Loan - Know the Difference
How Does a Salary Account Help Me Get a Personal Loan

How Does a Salary Account Help Me Get a Personal Loan?

How Does a Salary Account Help Me Get a Personal Loan?
How To Increase Your Personal Loan Amount-1

How To Increase Your Personal Loan Amount - A Step-By-Step Guide

How To Increase Your Personal Loan Amount - A Step-By-Step Guide
How to Get Instant Approval on a Personal Loan: 5 Easy Steps

How to Get Instant Approval on a Personal Loan: 5 Easy Steps

How to Get Instant Approval on a Personal Loan: 5 Easy Steps
What is the Maximum and Minimum Tenure for a Personal Loan

What is the Maximum and Minimum Tenure for a Personal Loan?

What is the Maximum and Minimum Tenure for a Personal Loan?
How to Secure a ₹50,000 Loan on an Aadhaar Card-1

How to Secure a ₹50,000 Loan on an Aadhaar Card

How to Secure a ₹50,000 Loan on an Aadhaar Card
How to Get a Personal Loan against a Cash Salary in India

How to Get a Personal Loan against a Cash Salary in India

How to Get a Personal Loan against a Cash Salary in India
How to Choose the Best Personal Loan for Yourself

How to Choose the Best Personal Loan for Yourself

How to Choose the Best Personal Loan for Yourself
Is EPF Advance Better Than A Personal Loan: A Comparative Guide

Is EPF Advance Better Than A Personal Loan: A Comparative Guide

Is EPF Advance Better Than A Personal Loan: A Comparative Guide
How to Get a PAN Card Loan of ₹50,000: Step-by-Step Process

How to Get a PAN Card Loan of ₹50,000: Step-by-Step Process

How to Get a PAN Card Loan of ₹50,000: Step-by-Step Process
  • Home
  • Articles
  • How a Personal Loan Affects Your Credit Score - The Pros and Cons