Do Personal Loans Hurt Your Credit?

Do Personal Loans Hurt Your Credit?

Many people use personal loans to help buy the things they need when the cost exceeds their savings. You may need to buy new appliances, have your vehicles repaired, pay for an event like a wedding, or something else.

An important consideration when applying for a personal loan is whether it will hurt your credit score. This isn’t something to be taken lightly since your credit score can impact your life in several different ways.

Why Is Having Good Credit Important?

Although having a good credit score can help you get approved for a loan, it can affect you in other ways. There are also some things you may not be able to do if your credit score is low.

For example, your credit score may be checked for:

  • Obtaining utilities
  • Getting a job offer
  • Leasing an apartment
  • Obtaining cell phone service
  • Getting a good rate on your car insurance 

How Do Personal Loans Work?

Personal loans are offered by both banks and credit unions and they can be used for many different purposes. There usually are few or no restrictions on what you can do with the money you borrow. They also often have fixed interest rates.

Personal loans are sometimes called signature loans because they don’t require any collateral. If you are approved for a personal loan, you will receive a lump-sum payment for the full amount you borrow. You will then repay it with fixed monthly payments.

The amount you can borrow with a personal loan varies depending on the lender. At San Francisco Federal Credit Union, our personal loans range from $500 to $50,000. The repayment term usually depends on how much you borrow. The terms at SFFedCU range from 61 days to 84 months.

Do Personal Loans Hurt Your Credit?

When you apply for a personal loan, a “hard” credit check will be done to see if you have a good payment history. A hard credit check is typically done when you apply for credit. This type of credit check temporarily decreases your credit score a small amount, but only for one year. 

A “soft” credit check, on the other hand, is done for other purposes—like when you apply for insurance or when you apply for a job. Soft credit checks do not affect your credit score.

This small and temporary decrease in your credit score may be offset by the benefits of having a personal loan. Having a personal loan may help your credit score in several ways—as long as you make all of your payments on time.

Some lenders offer special personal loans—called credit builder loans—just to improve credit. The idea is to repay a small loan over a year so that your timely payments will be reported to the credit bureaus. At SFFedCU, we offer a share secured personal loan as well as a secured credit card, with a payment history of both reported to the bureaus to help you build your credit. 

How Can Personal Loans Improve Your Credit?

There are three important ways that a personal loan can help you improve your credit score. It’s important to keep in mind that credit scores don’t change quickly. It may take several months for your score to improve.

On-Time Payments

When you make payments on a personal loan, they are reported to each of the three credit reporting bureaus (Equifax, TransUnion, Experian). As long as your payments are made before their due dates, they will help to improve your credit score.

Diversifying Your Credit Mix

A factor that makes up 10% of your credit score is something known as the credit mix. This refers to the different types of credit accounts that you have. Having a mix of credit indicates that you are good at handling credit. A personal loan could help to diversify your credit mix and improve your credit score.

Consolidating High-Interest Debt

One way that a personal loan may help your credit is if you currently have several high-interest debts, like credit card or store card debt. The more debts you have, the more difficult it is to keep up with them. If you start missing payments, it will harm your credit score.

A potential solution to this problem is a debt consolidation loan, like the one offered by SFFedCU. These loans allow you to borrow the money you need to repay your high-interest debts and replace them with one loan. A debt consolidation loan is easier to keep up with, and it will have a lower interest rate.

Consolidating debt with a personal loan may also help you lower your credit utilization ratio, which will help your credit score. Your credit utilization ratio is the percentage of your credit limit that you’re currently using. Using too much at once will harm your credit score.

Personal loans don’t factor into your credit utilization ratio. Because of this, the consolidation of certain debts with a personal loan will allow you to quickly pay them off. This will help to lower your credit utilization ratio and improve your credit score.

Is There Another Way to Improve Your Credit?

Another option to consider for paying off your unsecured loans to improve your credit is a debt management plan, such as the one offered by San Francisco Federal Credit Union’s partner, BALANCE.

Debt management plans are offered by credit counseling agencies. If you partner with an agency like BALANCE, a credit counselor will create a plan to help you pay off your unsecured debts in three to five years.

An important benefit of a debt management plan is that you make one payment each month to the agency for all of your unsecured debts. The agency then distributes the payments on your behalf. This ensures that all of your payments will be made on time. A counselor will also try to negotiate lower interest rates and have fees waived for you.

Where Can You Get a Personal Loan?

There’s a reason why personal loans are among the most popular financing options. They are quick and convenient, and the money you borrow can be used for many different purposes.

But, where can you get a personal loan?

Good news! If you are interested in applying for a personal loan, you have several options. Click below to learn about where you can find personal loans in the San Francisco area. You may be closer than you think to borrowing the money you need.

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