Personal Loans and Your Credit Report: Duration and Impact
Understand how personal loans affect your credit report, including how long they remain visible and influence your credit score.
Personal loans can have both short-term and long-term impacts on your credit report and credit score, depending on how you manage them. Here's a breakdown of how personal loans can affect your credit:
Short-Term Impact:
Credit Inquiry: When you apply for a personal loan, the lender will typically perform a hard inquiry on your credit report. This inquiry can cause a temporary dip in your credit score, usually by a few points. Multiple hard inquiries in a short period can have a more significant impact.
New Account: Once your personal loan is approved and you accept it, a new credit account will be added to your credit report. The presence of a new account can initially lower your credit score slightly.
Credit Mix: Personal loans are considered installment loans, and having a diverse mix of credit types, including credit cards (revolving credit) and installment loans, can positively impact your credit score. In the short term, this can have a slight positive effect.
On-Time Payments: Making on-time payments on your personal loan is essential for your credit. Consistently making payments as agreed can have a positive short-term impact, as it demonstrates responsible credit management.
Long-Term Impact:
Payment History: Your payment history, including your personal loan, is one of the most critical factors in your credit score. A positive payment history, with on-time payments over the life of the loan, can significantly improve your credit score over time.
Credit Utilization: Personal loans are installment debt, so they don't directly affect your credit utilization (which mainly applies to credit cards). However, by using a personal loan to consolidate high-interest credit card debt and then paying off those credit cards, you can indirectly improve your credit utilization, which has a long-term positive effect.
Loan Payoff: Successfully paying off your personal loan as scheduled can improve your credit score by demonstrating your ability to manage and pay off installment loans.
Credit Age: The age of your credit accounts affects your credit score. Keeping the personal loan account open and in good standing can increase the average age of your accounts over time, which can positively impact your credit.
Credit Mix: Maintaining a diverse mix of credit accounts, including personal loans, credit cards, and mortgages, is generally good for your credit score. This is more of a long-term consideration.
However, it's important to note that missing payments or defaulting on a personal loan can have significant negative long-term effects on your credit. Late payments and defaults can stay on your credit report for several years and substantially lower your credit score.
In summary, personal loans can have both short-term and long-term impacts on your credit report and score. Responsible management of your personal loan, including making on-time payments and paying it off as agreed, can contribute positively to your credit history. On the other hand, mismanaging the loan can have detrimental effects on your credit. Always consider the long-term implications of taking out a personal loan and ensure that it fits into your overall financial strategy.
How Long Do Personal Loans Stay on Your Credit?.
Personal loans typically stay on your credit report for 10 years after the account is closed. However, there are a few exceptions to this rule. For example, if you have a late payment or default on your loan, the negative information may stay on your report for seven years. Additionally, if you file for bankruptcy, the bankruptcy information will stay on your report for 10 years from the date of filing.
It is important to note that even though a personal loan may stay on your credit report for 10 years, the impact on your credit score will diminish over time. This is because lenders use a variety of factors to calculate your credit score, including the age of your accounts, your payment history, and your credit utilization ratio. As your personal loan ages and you make on-time payments, the impact on your credit score will become less significant.
Here are some tips for improving your credit score after taking out a personal loan:
- Make all of your payments on time and in full. This is the most important factor in improving your credit score.
- Keep your credit utilization ratio low. Your credit utilization ratio is the amount of credit you are using compared to your total available credit. It is best to keep your credit utilization ratio below 30%.
- Pay down existing debt. The more debt you have, the lower your credit score will be. Try to pay down your existing debt as quickly as possible.
- Don't open too many new accounts in a short period of time. Every time you open a new account, a hard inquiry is placed on your credit report. Hard inquiries can temporarily lower your credit score.
If you have a personal loan and you are concerned about the impact on your credit score, you can check your credit report regularly to make sure that it is accurate and complete. You can also get a free copy of your credit report from each of the three major credit bureaus once per year at AnnualCreditReport.com.