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How Personal Loans Affect Your Credit

A personal loan can be an advantageous way to acquire cash quickly or consolidate debt. If you’re considering a personal loan, it’s important to understand the effects it can have on your credit. A personal loan has the potential to hurt or to help your credit, depending on how you manage the loan.

How Personal Loans Can Hurt Your Credit

A personal loan can hurt your credit in the event that you end up missing even a solitary regularly scheduled payment. Because payment history makes up 35% of your credit score, a late or missed payment can have a significant impact on your credit.

In addition to on-time payments, it’s important to pay off the loan in full. However, paying the loan off early won’t necessarily lead to an improvement in your credit score. Your credit score benefits from having an open account with a history of on-time payments.

How Personal Loans Can Help Your Credit

While risky, personal loans can have a positive effect on your credit. To begin with, it adds an account with positive payment history to your credit report, as long as you routinely pay on schedule.

A personal loan can also benefit your credit by adding to your credit diversity. This is especially beneficial if your only source of credit is in the form of credit cards. Credit scoring companies look positively at consumers who responsibly manage various types of credit.

A personal loan for debt consolidation can also have a positive effect on your credit. Debt consolidation takes multiple balances of debt and combines them into a single loan. Ideally, this debt consolidation loan has a lower interest rate than those of the debt balances you’re combining. It might likewise lessen your credit utilization, which is a significant scoring factor that contrasts your revolving balances of credit with your credit limits. High credit utilization from high balances can drive up your credit usage and negatively impact your credit, yet your credit use on those cards will diminish to 0% when you progress those obligations to a debt consolidation personal loan. That can positively affect your credit.

Is a Personal Loan Right For Me?

Considering the positives and negatives of personal loans and their effect on your credit is essential to making the right decision for you. You may decide that a personal loan is a fit for your current needs, say, to consolidate debt, or you may realize the monthly payment of a personal loan doesn’t fit into your budget.

If you determine that a personal loan is a good option for your needs, the next step is to choose the right one dependent on loan interest fees, monthly payment, and additional features. Remember that a personal loan is a chance to improve your credit history, and it’s up to you to make the loan work for you.

Monitor Your Credit

If you take a personal loan, it’s especially important to monitor your credit for the effects the loan is having on it. It’s best to do this by regularly reviewing your credit report from the three major credit bureaus, Equifax, Experian, and TransUnion.

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