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Does Taking Out a Personal Loan Lower Your Credit Score?

A personal loan can have an impact on your credit score in a variety of ways, both positive and negative. Taking out a personal loan is not necessarily harmful to your credit score. However, it may have a short-term impact on your total credit score and make it more difficult for you to receive additional credit until the new debt is paid off.


Paying off a personal loan on time, on the other hand, should improve your total credit score. If you decide to take one out, make sure to research and compare all of your alternatives to qualify for the best loan possible.


What Factors Into Your Credit Score


Your overall credit score is based on the following five factors:


Your payment history. Always pay your bills on time, even if you have to make some sacrifices to do so. This is the most critical factor in determining your credit score and possibly whether or not you'll qualify for a loan.


Your current loan balances. This factor is also essential in determining your credit score, like your payment history. A credit utilization ratio of 30% or less is ideal, and anything over that could affect your application.


The length of your credit history. If you've been using credit for a long time, this will likely be a plus for you.


New credit. Although opening a new credit card account is not necessarily bad, you don't want to open too many at once.


Your mix of credit. A good mix of loan types, such as a revolving credit card and an installment loan, can help you qualify for better loans in the future.


The three major credit reporting bureaus used by lenders in the United States—Equifax, Experian, and TransUnion—provide comparable creditworthiness scores, although minor discrepancies may exist.


How a Personal Loan Can Affect Your Credit Score


A personal loan can have both short- and long-term effects on your credit. If you are looking to take out a personal loan to consolidate existing debt or finance a large purchase, you may be concerned that your credit score could take a hit.


Here are some of the ways a personal loan can affect your credit score in the short term:


  • A new loan can affect your credit utilization ratio, the percentage of your total credit allowed that you are actually using. In general, the lower this ratio, the better.

  • The lender may contact the credit reporting bureaus to let them know you are making the payment on time. A combination of paying off your loans on time, continuing to make other payments, and possibly even taking out new loans could help your credit score eventually.


Here are some of the ways a personal loan can affect your credit score in the long term:


  • Your new personal loan can affect your credit length of history, which is generally calculated by the age of your oldest account.

  • A new loan may affect your credit mix, which is the variety and combination of your credit accounts. A well-balanced credit mix often includes both installment loans and revolving credit. If you have a mortgage, an auto loan, and two credit cards, you have an excellent credit mix that will help maintain your score in good shape.

  • Finally, repaying your loan in full and on time is the best way to ensure that your credit score will be positively affected for the long term.


Conclusion


Although a personal loan can affect your credit score, it is not necessarily negative. If you pay off your loan on time and have a good credit history, you may find that you will be able to secure other loans with relatively low-interest rates, which can be a significant money-saving benefit.


Mid-Town Finance Company Huntsville offers straightforward, fair, and honest loans to those needing financial support. If you are looking for excellent personal loans and more in Huntsville, work with us today!



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