3 Ways a Personal Loan Could Hurt Your Credit

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  • A personal loan can be a convenient, affordable way to borrow money.
  • It can also cause damage to your credit score -- even if you do a great job of keeping up with your payments. 
  • Making payments late and even paying the loan off could result in a credit score hit. 

Be mindful of these before you take one out.

If you're looking to borrow money, then a personal loan is an option worth considering. With a personal loan, you'll generally be charged a lot less interest than what you'll see with a credit card. And also, personal loan interest rates are generally fixed, which means they can't rise over time. The result? Predictable monthly payments. 

But while a personal loan may be a convenient and even affordable way to borrow, you should know that taking out one of these loans could hurt your credit score to some degree. And unfortunately, this holds true even if you're never late with a payment. Here are three ways your credit score might take a hit in the course of getting a personal loan. 

1. Late payments could cause extensive damage

Because personal loans come with predictable monthly payments, you may be less inclined to fall behind on yours. But sometimes, life happens. You could wind up out of work for a period of time and skip some loan payments as a result. Or, you could end up facing a costly home or car repair that eats up your income for a given month, thereby making you late on a personal loan payment.

Any time you're late paying any loan, your credit score can take a hit -- and a big one at that. In fact, it's often the case that the higher your score, the more damage a single late payment can cause. That's something to be mindful of before applying for a personal loan. And it's also a reason to make sure you're not borrowing too much. 

2. A hard inquiry could knock your score down

Any time you apply for a loan, it results in a hard inquiry on your credit report. A single hard inquiry usually won't cause a lot of damage to your credit. If anything, your score might drop by about five to 10 points. But that sort of drop could end up being a problem if you're on the cusp of being able to qualify for another type of loan.

Say you're looking to buy a home and need a mortgage. It generally takes a minimum credit score of 620 to qualify for a conventional home loan. If your score is a 624 at the time of your personal loan application, the hard inquiry that ensues might drop your score just below that threshold -- and take the option to finance a home purchase off the table temporarily.

That's why it's important to apply for a personal loan at the right time. And if you know you'll be seeking out another large loan, like a mortgage, then it could pay to hold off on a personal loan until that larger loan is in place.

3. Your score might get dinged when you pay off your loan

It might seem counterintuitive, but often, paying off a loan results in a small hit to your credit score. Why so? A big part of your score is the length of your credit history. When you pay off a loan you've had for several years, it can shorten the average length of your active loans and credit accounts, resulting in a lower score.

Of course, you can't exactly not make your personal loan payments when you're supposed to. So eventually, you may run into a minor credit score hit when your loan is paid off. There's not really much you can do about that. But it's something you should be aware of. 

Borrowing money with a personal loan could be a smart choice. Just be mindful of the different ways a personal loan might impact your credit score.

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