The outstanding personal loan balances reached a record $ 305 billion last year. according to a study from the Experian credit bureau. The report also found that personal loan debt is growing faster than debt on auto loans, mortgages, credit cards, and student loans, with the average personal loan balance being $ 16,259.
Still, getting a personal loan can be a wise decision for some consumers, especially people using the money to consolidate high-yield debt at a lower interest rate, do necessary home repairs, or pay an emergency medical bill. Comparing personal loan companies credibly can help (and hopefully you’ll end up with some of the lowest prices for what you’re looking for).
The restriction: Taking out a personal loan can have a positive or negative effect on your creditworthiness depending on a number of factors. Here’s a look at how a personal loan can affect your credit score.
1. How personal loans can affect your credit score
Triggering too many tough inquiries on your credit report
Every time you do apply for a personal loanThe lender will do what is known as a “hard query” for your balance that involves an official move from Your credit report– a transcript of your credit history. A hard query can lower your credit score by up to five points. While a slight hit doesn’t necessarily seem like a big deal, submitting too many personal loan applications can hurt your score significantly.
Personal loans increase your debt burden
Your debt to credit utilization ratio – a measure of how much debt you have accumulated divided by the credit limit on the total of your accounts – is 30 percent of Your FICO score. In general, you want to keep your overall usage below 30 percent for a healthy score. However, as taking on more debt through a personal loan increases your credit utilization, it can damage your score in the process.
Missing personal loan payments
Paying personal loans on time is vital. While lack of a due date by some dates doesn’t usually affect your score, a 30-day late payment can bring your score down to 110 points if you’ve ever missed a payment on a credit account. according to the credit analysis company FICO.
Fair warning: defaulted personal loans will stay on your credit report for seven years. So you need to be extra careful to make your loan payments on time.
2. How personal loans can help your credit score
Building a positive credit history
Payment history is the most important factor in calculating your FICO score. It accounts for up to 35 percent of your score. according to myFICO.com. This can help build a positive credit history and grow your score over time if you are consistent in making your personal loan payments on each billing cycle. So it’s important to set – and stick to – a monthly budget to ensure you have enough cash to pay off your personal loan balance in full each month.
Create a mix of credits
Your score increases when you have an extensive combination of different types of credit card accounts, such as credit card accounts. B. Credit cards, mortgages, and personal loans as the credit mix is 10 percent of your score.
Reducing your loan utilization
How to apply for a personal loan
When you buy a personal loan offer, you can find the best deal and walk away with the lowest price. You can make the process a lot easier by using Visit to CredibleIt allows you to compare personal loan offers from multiple lenders in just two minutes. Interest rates start at 4.99% and loans range from $ 1,000 to $ 100,000. Plus, checking prices through Credible won’t affect your score and won’t cost you a penny.
You can also use Credible’s personal loan calculator to estimate how much you will pay for a loan and how long it will take to repay it.