The Relationship Between Personal Loans and Credit Scores

9 October 2025

Let’s talk about two of the most talked-about characters in the land of adulting—personal loans and credit scores. Sounds like the title of a romantic comedy, right? “The Relationship Between Personal Loans and Credit Scores”—a tale filled with drama, ups, downs, and maybe even plot twists! Grab some popcorn because this one’s juicier than your favorite Netflix binge.

Whether you're flirting with the idea of getting a personal loan or already knee-deep in one, this article will break down how these financial tools can either give your credit score a glow-up or kick it in the shins. Ready? Let’s dig into this financial love story.

What’s the Deal With Personal Loans?

First off, what even is a personal loan? Imagine going to a money vending machine (a.k.a. a bank, credit union, or online lender), saying, “Hey, I need a few thousand bucks,” and them saying, “Cool, pay me back monthly—with a little extra.” That’s basically a personal loan.

You can use them for nearly anything—consolidating debt, making home improvements, or even funding a spontaneous wedding because your cousin thought skydiving nuptials were a vibe.

There are two main types:

- Secured personal loans (you put up collateral, like your car)
- Unsecured personal loans (no collateral, but possibly higher interest)

Spoiler alert: Most personal loans are unsecured. So lenders rely heavily on your credit score to decide if they’ll let you borrow money, and at what interest rate.

Credit Scores 101: The Mysterious Number That Judges You

Your credit score is kinda like your financial report card—except worse, because you can’t study for it the night before. It’s a 3-digit number (ranging from 300 to 850) that tells lenders how risky (or responsible) you are when it comes to borrowing money.

Here’s a breakdown of what makes up your score:

1. Payment History – 35%
Did you pay your bills on time or ghost your creditors?

2. Credit Utilization – 30%
Are you maxing out your cards or just using a smidge?

3. Credit History Length – 15%
Are you a credit newbie or have you been in the game a while?

4. New Credit – 10%
How many times have you applied for credit recently?

5. Credit Mix – 10%
Do you have a healthy mix of credit types (loans, cards, etc.)?

It’s like baking a cake—each ingredient matters. Forget the eggs (payment history), and your cake’s flatter than a pancake.

Enter Personal Loan: Hero or Villain?

Let’s get to the real tea: how does a personal loan affect your credit score?

Well, like any relationship, it’s complicated. It can help or hurt your score depending on how you treat it.

🟢 How Personal Loans Can Help Your Credit Score

1. 🚀 Boosts Your Credit Mix

Lenders love variety. It’s like showing them you own a Swiss Army knife rather than just a butter knife. If you only have credit cards and add a personal installment loan into the mix—boom! Your credit mix improves and may give your score a nudge north.

2. 🧹 Helps You Consolidate Debt

If you’ve got several high-interest credit cards whispering, “You’re trapped forever,” a personal loan can feel like a superhero swooping in. You can use it to pay off those cards and reduce your credit utilization (another big factor in your score).

3. 🕰️ Builds a Positive Payment History

Each time you make an on-time payment, your credit report gets a gold star. Stack up enough of those good boy points, and voila! Your score rises like bread in an oven.

🔴 How Personal Loans Can Hurt Your Credit Score

1. ⛔ Hard Inquiry = Temporary Dip

The moment you apply for a personal loan, the lender checks your credit. This is called a hard inquiry, and yes, it gives your score a minor bruise—usually a drop of about 5–10 points. Don't worry, it heals within a few months.

2. 📉 Missed Payments = Doom

Let’s be real: if you treat your personal loan like that unread book on your shelf, your credit score will throw a tantrum. Late or missed payments are credit killers—like letting termites loose in your financial foundation.

3. 📊 Increases Total Debt

If you’re already juggling debt and add another loan on top, lenders might start side-eyeing you. It increases your debt-to-income ratio, which—while not directly in your score—can still paint you as a risky borrower.

Real-Life Example: Meet Jake

Jake, 32, got a personal loan to consolidate $10,000 in credit card debt.

- Before: Score was 650, juggling 4 cards, stressed out.
- After loan:
- Paid off all cards
- Credit utilization dropped from 85% to 5%
- Made on-time payments monthly

Fast forward a year, Jake’s score jumped to 720. He’s sleeping better than a cat in a sunbeam. Why? Because he played the game right.

Moral of the story: personal loans are tools, not toys. Use them wisely.

Tips to Use a Personal Loan Without Destroying Your Credit

Okay, so you’ve decided to get a personal loan. Want to keep your credit score happy? Follow these golden rules:

1. 🧐 Shop Smart

Don’t apply all willy-nilly. Use lenders that offer prequalification, which only requires a soft credit check (no score ding).

2. 💸 Borrow Only What You Need

Getting a $25,000 loan to remodel your kitchen when all you really need is $5,000 to fix a leaky pipe? That’s like ordering a 5-course meal when you’re only hungry for a snack.

3. 📆 Never Miss a Payment

Set reminders. Use autopay. Tattoo the due date on your forehead (okay, maybe don’t do that). Payment history is credit king.

4. 🦉 Understand the Terms

Know your interest rate, monthly payment, loan term, and any fees. Surprise charges are nobody’s friend.

5. 🔁 Avoid the Rebound Loan

Don’t take out another personal loan to repay the first one unless you’re consolidating at a lower rate. That’s like putting out a fire with oil.

FAQs: You Asked, We Answered

❓Do personal loans affect your credit score right away?

Yes, usually you’ll see a small dip after the hard inquiry. But if you keep up with payments, your score can improve over time.

❓Can you improve a bad credit score with a personal loan?

Absolutely! Used responsibly, a personal loan can clean up your financial mess, reduce credit card debt, and help build a good payment history.

❓Is it bad to pay off a personal loan early?

Not necessarily. Just check if there are any prepayment penalties. Some lenders think paying early is ghosting too soon.

The Verdict: Love It or Leave It?

Personal loans are like dating a responsible adult. If you're mature, committed, and pay your dues—literally—it can be a beautiful relationship that boosts your credit score and earns you street cred with lenders.

But if you're impulsive, forgetful, or treat it like free money—it won’t end well. Like, “burn your credit score to the ground” not well.

So, are personal loans a match made in credit score heaven? Maybe. Just make sure you're swiping right for the right reasons.

Final Thoughts

Think of your credit score as your financial reputation. And personal loans? They're the new job, gym membership, or haircut that can elevate that reputation—or tank it if you’re not careful.

Use them wisely, treat them with respect, and they might just help you level up your credit game. Abuse them, and they’ll come back to haunt you harder than that embarrassing email you sent your boss at 2 a.m.

So here’s your takeaway: Personal loans and credit scores are in a complicated relationship. It's up to you to make it a healthy one.