Will Applying for a Personal Loan Hurt My Credit? The Complete Answer

No, applying for a personal loan will not hurt your credit. The key to understanding the credit impact of a loan application is knowing the difference between two types of credit checks.

By Princella Esther Agyei Certified Credit Counselor & HR Manager, HR People Associates

It’s one of the most common fears people have when they need to borrow money: “Will the simple act of applying for a loan damage my credit score?” It’s a valid concern. You’re trying to improve your financial situation, not make it worse. The short answer is yes, applying for a personal loan can cause a small, temporary dip in your credit score. But the full story is much more nuanced and, ultimately, more reassuring.

This guide will explain exactly how and why a loan application affects your credit, show you the smart way to shop for loans without harming your score, and reveal how a personal loan can actually become a powerful tool for building your credit in the long run.

The Quick Answer: How a Personal Loan Affects Your Credit

• The Application (Hard Inquiry): When you formally apply for a loan, the lender performs a “hard inquiry” on your credit. This can cause your score to drop by a few points temporarily.
• Shopping Around (Soft Inquiry): Checking your rates through a lender’s prequalification process only results in a “soft inquiry,” which does not affect your credit score at all.
• The New Account (Short-Term Impact): If you’re approved, the new loan will lower the average age of your credit accounts and increase your total debt, which can also cause a minor, temporary dip.
• The Repayment (Long-Term Benefit): Making consistent, on-time payments on your new loan is one of the best ways to build a positive payment history, which is the most important factor in your credit score.

Understanding Hard vs. Soft Credit Inquiries

The key to understanding the credit impact of a loan application is knowing the difference between two types of credit checks.

Soft Inquiry (or Soft Pull): This happens when you or a company checks your credit as part of a background check. Examples include checking your own credit score, employer background checks, or getting “pre-approved” for loan offers. Soft inquiries are not visible to lenders and have zero impact on your credit score.

Hard Inquiry (or Hard Pull): This occurs when a financial institution checks your credit when making a lending decision. This happens when you formally apply for a mortgage, an auto loan, a credit card, or a personal loan. A hard inquiry signals to other lenders that you are actively seeking new credit.

A single hard inquiry will typically only lower your score by less than five points, and its impact fades over time. While it stays on your credit report for two years, it generally only affects your FICO® Score for one year.

The Smart Way to Shop for a Loan Without Hurting Your Score

Because of the impact of hard inquiries, you should never submit full, formal applications to multiple lenders just to see what rates you can get. Instead, you should leverage the power of prequalification.

Nearly all reputable online lenders offer a prequalification process. This allows you to submit basic financial information to see the estimated rates and terms you might qualify for. This process only requires a soft credit inquiry, so you can compare offers from multiple lenders without any negative effect on your credit score. This is the single most important strategy for finding the best loan at the lowest cost.

How a New Personal Loan Can Help Your Credit Score

While the application process can cause a small temporary dip, a well-managed personal loan can significantly improve your credit score over time in three key ways:

1. Builds Positive Payment History: Your payment history is the most influential factor in your credit score, making up 35% of your FICO® Score. By taking out a personal loan and making every single payment on time, you are adding a powerful record of responsible credit management to your report.
2. Improves Your Credit Mix: Lenders like to see that you can responsibly handle different types of credit. If your credit history only consists of revolving debt (like credit cards), adding an installment loan (which has a fixed repayment term, like a personal loan) can improve your “credit mix,” which accounts for 10% of your FICO® Score.
3. Lowers Your Credit Utilization Ratio: This is particularly true if you use the personal loan for debt consolidation. Your credit utilization ratio-how much of your available credit you’re using-is the second most important factor in your score. When you use an installment loan to pay off high-balance credit cards, you convert revolving debt into installment debt. This can dramatically lower your credit utilization ratio and often results in a significant and immediate boost to your credit score.

Your Action Plan for a Credit-Smart Loan Application

Don’t let the fear of a small credit score dip prevent you from accessing a loan that could improve your financial health. By following a smart process, you can minimize the negative impact and maximize the long-term benefits.

1. Know Your Score: Check your credit score and report before you begin. This is a soft inquiry and won’t hurt your score.
2. Prequalify, Don’t Apply: Use prequalification tools to compare estimated rates from at least three to five different lenders. This has no impact on your credit.
3. Choose the Best Offer: Once you’ve found the loan with the best terms, submit one formal application to that single lender. This will result in only one hard inquiry.
4. Pay on Time, Every Time: Once your loan is funded, set up automatic payments and treat your repayment schedule as your top priority. This is your opportunity to build a stellar payment history and a stronger financial future.