How Personal Loans Can Impact Your Credit Score

How Personal Loans Can Impact Your Credit Score

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When it comes to paying for some of life’s biggest expenses – a home improvement, a big medical bill, an emergency, a wedding or even a funeral – many people find themselves running out of money to cover these costs immediately.

A personal loan is a form of credit that can be useful in these cases. And according to a 2019 Experian study, personal loans are the fastest growing form of debt in the United States. But when it comes to taking on any form of additional debt, consumers should take the time to consider how this new line of credit may affect their financial situation. life, including their credit score.

So, does taking out a personal loan have a positive or negative impact on your credit score? Really, it depends.

Why use a personal loan in the first place

Personal loans generally allow you to borrow money at a much lower interest rate than if you were to put the expenses on a credit card. According to Federal Reserve, the current average APR for a two-year personal loan is 9.58%. On the other hand, the average interest rate on a credit card is 16.30%, but can reach 24%. So a personal loan can be a cost-effective way to cover a big expense or consolidate debt.

How a personal loan can improve your credit score

Taking out a personal loan can help improve your credit mix. Your credit mix refers to the different types of credit accounts you have, including credit cards, loans, mortgages, etc., and represents 10% of your credit score.

While it’s not necessary to have an account of each type, having multiple accounts can show lenders that you have the ability to handle multiple types of credit. This can help because financial institutions are more likely to consider you a more creditworthy borrower when applying for a new form of credit, such as a mortgage or car loan. (Just make sure you don’t go into too much debt.)

Personal loans can also help you build a balance sheet to make payments on time. Payment history is the most important factor in calculating your credit score — it accounts for 35%. Making your monthly payments on time and in full can provide clues to a lender that you’re very likely to continue paying the money you owe if you apply for another line of credit in the future.

This is especially important when you are just starting to establish or improve your credit. In fact, while a low credit score is usually a barrier to most loan approvals, some lenders actually offer personal loans aimed at people with fair or bad credit.

Reachedfor example, accepts applicants with a credit score of 600 or less and even those whose credit history is so poor that they don’t even have a credit score.

OneMain Financial Personal Loans also offers an option for those with fair or poor credit. Before you apply, remember that taking out a personal loan with poor credit means you may pay higher interest rates and some fees.

Beginner personal loans

  • Annual Percentage Rate (APR)

  • Purpose of the loan

    Debt consolidation, credit card refinancing, marriage, moving or medical

  • Loan amounts

  • terms

  • Credit needed

    FICO or Vantage score of 600 (but will accept applicants whose credit history is so poor that they have no credit score)

  • Assembly costs

    0% to 8% of target amount

  • Prepayment penalty

  • Late charge

    Greater of 5% of monthly amount past due or $15

OneMain Financial Personal Loans

  • Annual Percentage Rate (APR)

  • Purpose of the loan

    Debt consolidation, big expenses, emergency expenses

  • Loan amounts

  • terms

  • Credit needed

  • Assembly costs

    Flat fee from $25 to $1,000 or percentage ranging from 1% to 10% (depending on your state)

  • Prepayment penalty

  • Late charge

    Up to $30 per late payment or up to 15% (depending on your state)

How a personal loan can hurt your credit score

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Another thing to keep in mind is that personal loans can be very useful tools for debt consolidation and debt repayment. However, the habits that got you into debt in the first place can make a personal loan feel more like an added financial burden.

For example, if you take out a personal loan to max out a credit card, but then go ahead and max out the credit card again immediately after, you’ll be stuck with more credit card debt and a personal loan to repay.

This cycle of debt can also negatively impact your credit score if the burden of extra payments is so high that you start to miss monthly payments or you don’t make full payments and it hurts your rate. credit usage.

Always make sure you have a plan to pay off any additional debt you incur before you even submit your application. And getting to the root of any not-so-sound financial habits can ensure that you’re actually solving the problem instead of just dealing with a symptom of the problem.

At the end of the line

A personal loan can be an affordable way to finance a major expense, cover an emergency, or even consolidate debt. But like any other form of credit, its impact on your credit score can depend on how it’s used.

A slight drop in your score after the application is usually to be expected as a lender will do a thorough investigation of your credit. But using a personal loan to diversify your credit mix and make on-time payments for your balance can have a positive impact on your score.

Just be aware of all the unhealthy financial habits that could easily turn a personal loan from a resource into a burden.

Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff only and have not been reviewed, endorsed or otherwise endorsed by any third party.

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