Can a Personal Loan Negatively Affect Your Credit Score?
Word has been going around that applying for new credit affects your current credit score negatively. There is some truth to it, which is why it’s not advisable to apply for new credit before you close on your home when you get a mortgage. However, there’s more that’s left unsaid. Although getting a personal loan can hurt your credit in the beginning, its impact is not as significant as what some may think.
The long-term effects of having a personal loan on your credit report outweigh the initial pain of getting one. You can get a wide range of terms and amounts when you apply for a personal loan. As such, it isn’t easy to give a one-size-fits-all answer.
Generally speaking, though, a personal loan will make an immediate yet small drop on your credit score. But as mentioned before, that isn’t where it ends.
The Positive Outweighs the Negative
A personal loan can hurt your credit score because it is considered new credit. If you make an inquiry on your credit report, the new account will reflect negatively. However, this new credit category will only make up 10% of your score. It will be easy to overcome by the positive influence of the other categories.
If you manage to make your monthly payments on time, it will reflect well on your credit report. This consistent behavior of yours can then be interpreted as you have a strong payment history. Eventually, your outstanding balance will decrease in time. Categories under these principles make up 65 percent of your overall score, and the new credit status of your account will dissipate after a year or so.
Additionally, if you use a personal loan to pay for your credit card debt, you can expect to have a significant credit boost. Installment debt, such as personal loans, is generally more favorable. It also leaves your credit cards with as little balance as possible.
When a Personal Loan Can Hurt Your Credit Loan
The positive effects of getting a personal loan will only occur if you observe good financial practices before and after you get one. If you don't make payments on time, your personal loan can eventually hurt your credit. Payments usually get reported when they come in a month late—as such, paying your loans on time is critical if you want to protect your credit score and avoid paying late fees.
Additionally, when you apply for a personal loan around the same time that you apply or open other credit accounts, you will feel the negative effect of the “new credit” even more. Having one new account or credit inquiry will only hurt your credit score by a few points, but you can easily make up for it sooner or later. However, having multiple credit accounts will be challenging for you to overcome.
Personal Loans Have a Long-Term Positive Effect
It’s difficult to determine the exact effects of a personal loan on your credit score because circumstances vary so widely, and many factors need to be considered. However, the general experience is an initial mild drop in the beginning. Anything beyond that depends on the person and their financial habits. If you manage your loan responsibly, you can expect a strong positive effect in the long run.
Applying for personal loans can negatively impact your credit score in the first year. But by being responsible for your credit accounts and paying on time, you can feel the benefits soon enough. So if you are searching for financial institutions to provide the financial assistance you need, we can help you out.
Hometown Finance offers installment loans in Murfreesboro, TN. We understand how essential loans can be, especially in your time of need. As such, we ensure that anyone who needs to apply for one has a chance to get the financial aid they need. For inquiries, contact us today.