If you’re considering a personal loan, chances are you’re also considering this big question: “will getting a personal loan hurt my credit score?” It’s a great question, especially if you’re trying to establish or build credit.
A personal loan is a great way to pay unexpected bills, to make a large purchase, or even to improve your credit score. That’s right – getting a personal loan can actually help your credit score.
Credit scores are tricky, though, and the answer is not as simple as hurting or helping. Understanding what factors determine your credit score – and the positive and negative impacts that a personal loan can have on it – is the key to answering that big question: “will getting a personal loan hurt my credit score?”
Factors that determine credit score
You know that your credit score is a number that fluctuates to reflect your likelihood of paying back borrowed money, but what goes into that number? There are a few factors that determine your overall credit score:
- Payment History
- Amounts Owed
- Length of Credit History
- New Credit
- Credit Mix
Each of these factors will be affected in different ways, at different times as you apply for, are approved for, and pay back your personal loan.
When you apply
When it comes to credit checks, each lender varies. When you apply for a World Finance loan online, we see if you qualify using a soft credit check. Soft credit checks do not affect your credit in any way. When you apply in person or are contacted to move forward with opening a loan, we use a hard credit check, which does have an effect on credit.
When getting approved
Moving through loan approval will most often require a hard credit check. A hard credit check is a more detailed look into your credit history, and is reported to the credit bureaus as an inquiry. Usually, each hard check leads to about a 5-point credit score drop, and is typical (and expected) of any credit inquiry. The more credit inquiries you make, the more your credit score will be negatively affected. One credit inquiry on your way to loan approval, though, is normal.
When paying back your loan
This is where you really have the chance to grow your credit. Remember those five factors that impact your credit score? Payment History is the most significant one. When you make your payments on time and consistently, you’re likely to see your credit score climb.
If you miss or are late on a payment, though, your credit score will take a hit. If it becomes a pattern, your credit score is likely to decrease significantly. The best thing to do if you miss a payment or have to pay late is to get back on track and keep going. If you have a World Finance personal loan, we will even work with you when you are having trouble making payments – all you have to do is reach out to your local branch.
When you get a personal loan, you have the opportunity to either hurt or help your credit score. Throughout the whole life of your loan, your score might go up and down – that’s okay. A credit score isn’t a static thing. When you find manageable ways to make on-time, consistent payments, though, your credit score can help you reach your financial good.