Have you ever been hit with an unexpected expense like a medical bill or an urgent home repair that you don’t have the budget for? A personal loan can help you pay your emergency expenses when you don’t have enough money on hand. 

But do personal loans affect Credit score?

Well, yes! Just like any other form of credit, a personal loan affects your credit score in both good and bad ways. Read on to find out how personal loans affect your credit score so you can know about all the risks involved before applying for one.

How Does a Personal Loan Affect Your Credit Score? [5 Ways]

A personal loan affects your credit score just like any other type of credit. If you pay your monthly payments on time, it will build your credit score. If you make late payments, your credit score will be affected badly.

Your credit score is affected by a personal loan in multiple ways. In fact, the moment you apply for a personal loan, you will notice a slight decline in your credit score.

Continue reading to find out how a personal loan affects your credit score in various ways.

1. Applying for A Personal Loan

When you submit a personal loan application, your lender will request a credit report. This is known as “hard inquiry”. A hard inquiry affects your credit score temporarily, causing it to drop by a very small percentage.

Moreover, many borrowers check with multiple lenders to get the best deal on a personal loan. For instance, if you are based in Provo City, you can look up “personal loans in Provo City” on the internet to find multiple lenders.

Many lenders will pre-qualify you by just running a soft credit check. This allows lenders to check your credit report. A soft inquiry does not affect your credit score. 

But if multiple lenders are requesting a soft inquiry simultaneously or within a short period of time, it can have the same effect on your credit score as a hard inquiry. 

1. Making Payments

When it comes to making monthly installments on your personal loan, you have the opportunity to improve by making timely payments. These payments account for about 35% of your score. 

By staying on top of your monthly payments and having a record of 100% on-time payments, you can see a considerable improvement in your credit score.

However, late or missed payments can affect your credit score badly. If you have missed a monthly payment even just once, you can see a huge drop in your credit score, which is also reflected on your credit report. 

1. Diversifying Your Credit Portfolio

Your credit portfolio represents the types of credit accounts you have, such as mortgage loans, credit cards, personal loans, etc. If you have various types of credit accounts on your credit report, it works in your favor as lenders prefer a diverse credit mix.

So if you only have credit cards on your credit portfolio and you are applying for a personal loan now, it can improve your credit score.

1. Debt Consolidation

If you are using your personal loan to consolidate a debt, it can give your credit score a boost. For instance, if you are unable to pay your credit card bill and it continues to mount, you can take out a personal loan to pay off all your credit card dues. 

Since personal loans come with a lower interest rate, you can avoid multiple high-interest credit card payments by consolidating your debt with just one low-interest monthly payment. 

However, this would only work in your favor if you are trying to consolidate your credit card debt in the long term. If you make it a habit to use personal loans to consolidate credit card debts, you will find yourself maxing your credit cards out more quickly.

1. Closing Your Personal Loan Account

When closing your personal loan account, you will notice a slight drop in your credit score temporarily. This is because you will be losing the boost you had on your credit score due to that account. It is also because your credit mix will become less diverse after the closure.

Even though you can still notice a positive effect on your score if the account closure is handled right, it won’t be the same as having an open account. 

Boost Your Credit Score With Our Easy Personal Loans — Apply Today!

With Cash In Minutes, you don’t need to worry about your credit score getting affected badly. We make it easier for you to repay your loans by offering easy and affordable monthly installments, lower interest rates, and not requiring a hard inquiry on your credit report.

This way, you can easily pay your monthly installments without getting overburdened. What’s more, we don’t care if you have a poor credit score! We accept bad credit so you can get instant cash in times of need. 

Apply online for a personal loan in Utah today and get your funding the same day. If you are looking for a personal loan in Provo City, stop by our office today and fill out your loan application in person.