Will a Personal Loan Hurt My Credit Score?

The quick answer? It could.

Maintaining a solid credit score isn’t just a matter of having bragging rights. A strong credit score could save you money and open the door to more borrowing opportunities.

Let’s imagine you have a credit score of 800, which is considered excellent. Doing so might mean snagging a much lower interest rate on a loan than what you’d get with a lower score. The result? Lower, more affordable monthly payments.

Meanwhile, if you’re looking for a flexible way to borrow money, you may be inclined to look at a personal loan. Personal loans allow you to borrow money for any purpose, whether it’s furnishing a home or kicking off a small business venture. And they tend to close quickly and often come with competitive interest rates.

But if you’re thinking of getting a personal loan, you may be wondering whether it will impact your credit score. The quick answer? It could -- for better or worse.

Applying for a personal loan

Whenever you apply for a loan, a lender performs a hard inquiry on your credit report. That commonly results in a minor credit score hit -- somewhere in the ballpark of five to 10 points. 

That sort of drop generally isn’t a big deal. If you have a credit score of 800 and it drops to 792, that shouldn't hurt your chances of getting to borrow money when you want to.

Paying off your personal loan

The way you manage your personal loan could impact your credit score. If you pay your loan on time every month, that could help your credit score improve or remain strong. But if you fall behind on your loan payments, your credit score could take a serious hit.

The most important factor that goes into calculating your credit score is your payment history. That speaks to how consistent and reliable you are with regard to paying your bills. 

If you always make a point to pay on time, it sends the message to lenders that you can be trusted to borrow money because you're good for it. But if you're late with your payments, it sends the opposite message -- that lending you money is a big risk.

If you're a few days late with a single personal loan payment, it may not do much damage to your credit score. But if you're consistently months late on your payments, your score could really drop quite a bit.

As such, if you're going to take out a personal loan, take a look at what your monthly payments under it will entail and make sure they fit into your budget. And if you're not sure, hold off on borrowing, or borrow less.

Once your credit score sustains damage, it can take a lot of time for it to improve -- especially if the source of that damage is a late payment or a series of late payments. And you don't want to put yourself in a position where you're out of borrowing options because your credit score has plunged. 

All told, a personal loan could hurt your credit score or help it -- it all depends on how you handle your payments. If you want to minimize your risk of falling behind on your personal loan, be very careful with how much you borrow.