When Do Loans Start Affecting Your Credit Score?

by Ashley Nielsen
When Do Loans Affect Credit Score photo

Unfortunately, it’s easier to damage your credit score than it is to build good credit, so every time you take out a loan, you must weigh the pros and cons of how it will impact your credit score.

Many people need loans from time to time. Whether you’re paying for school or trying to cover a large expense, sometimes a loan is necessary. However, while many think of loans as bad, they don’t have to be. Loans affect your credit score before they’re a line of credit, but they don’t have to hurt your score in the long term. By making on-time payments, a loan can even help you build your credit score. However, making late payments can damage your score when those payments are reported to the major credit bureaus. Right now, you might be wondering when loans start affecting your score and how they affect your score. Let’s dive deeper into this topic to help you learn more about loans and your credit score.

When Do Loans Affect Your Credit Score?

Unfortunately, personal loans can affect your credit score as soon as you apply for one because the lender inquires into your credit history. There are two types of credit inquiries: soft and hard. Soft inquiries do not affect your score, but hard inquiries can. Any type of lender can perform a hard inquiry, but they’re most common when taking out car loans, mortgages, and student loans. Therefore, loans can impact your credit score immediately, even if you’re not approved for a loan, so it’s always best to ensure you qualify for the loan before a lender makes a hard credit inquiry that can affect your ability to get a loan soon.

Luckily, you can determine whether or not you qualify for a loan by going through a pre-qualify process with a lender. Pre-qualifications use soft inquiries that won’t affect your credit score and can help you shop around for a personal loan to find the best lender. Once you find a lender, a formal application will trigger a hard credit inquiry, with new credit applications accounting for 10% of your credit score. Therefore, your credit score will go down a few points, but it should not have a significant impact on your score unless you apply for multiple loans from several lenders.

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Loan Repayment

Repaying your loan also affects your credit score. Payment history is an important factor in calculating your score, so you must have a consistent record of on-time payments to help build credit. Lenders typically report repayments to all three national credit bureaus, and your FICO score comprises at least 35% of your repayment history.

Repaying your loan on time can help you build your credit score. Every month your loan amount goes down, and your score will increase. However, missing a payment can drastically lower your credit score. Missing a due date by more than 30 days means it will likely be reported to the credit bureaus and damage your score. Unfortunately, with credit scores, it takes longer for your score to go back up than it does to decrease drastically.

A single missed payment of over 30 days can reduce your credit score by up to 100 points or more, dropping you from excellent to fair or fair to bad credit because of one missed payment. Therefore, you should always pay your bills on time to avoid negatively impacting your credit score.


Many people think that refinancing their loans will decrease their payments, but this isn’t always the case. Always shop before signing any contracts because applying for a new loan will negatively impact your credit score. When applying for new loans, always do so within the same few weeks because multiple hard inquiries of the same type can count as a single inquiry under the FICO credit scoring model. For example, if you want to apply for a mortgage, applying with multiple lenders around the same time will result in only one hard inquiry, reducing the amount of damage the inquiries can do to your score.

Debt Consolidation

Debt consolidation is often confused with refinancing because they’re similar concepts that help lower your monthly payments. However, they mean different things. Debt consolidation allows you to add all your debts into a new loan, offering you a single payment each month, while refinancing offers you the opportunity to refinance different loans separately. Debt consolidation is appealing because you can get a lower interest rate on a single loan and keep your debt together under one payment every month to help you easily pay off your debts.

Of course, you’ll still have to apply for a new loan, which means another hard inquiry. Still, as long as you can pay off your debt, your credit score will increase each month by lowering your credit utilization ratio– the amount of your available credit– another significant factor for calculating your score.

Does Paying Off Loans Build Credit?

Paying off your loans will help build your credit, so loans aren’t all bad. Depending on your loan type, your credit score will increase over time as long as you make monthly payments. If you’ve only ever had a credit card, having another type of loan can increase your score by giving you a healthy mix of credit, which is a small factor in calculating your total score.

Final Thoughts

Taking out loans can help or hurt your credit score; it all depends on how you manage your debts. For example, paying your loan off on time every month can increase your score, give you a better credit mix, and reduce your credit utilization ratio. Meanwhile, not paying your loan off on time can get you deeper into debt, ultimately making it harder for you to pay off your debts while decreasing your credit score.

Unfortunately, it’s easier to damage your credit score than it is to build good credit, so every time you take out a loan, you must weigh the pros and cons. If you can ensure you’ll be able to make your monthly payments on time, you can boost your credit score while paying off your loan. However, putting yourself further into debt may not be worth it if you cannot properly manage your finances. Luckily, you can use tax software or money management apps to keep track of your bills and set up automatic payments through your lender to make it easier to pay off your debts without worrying about missed or late payments.

Reviewed September 2022

About the Author

Ashley Nielsen earned a B.S. degree in Business Administration Marketing at Point Loma Nazarene University. She is a freelance writer where she shares knowledge about general business, marketing, lifestyle, wellness or financial tips. During her free time she enjoys being outside, staying active, reading a book, or diving deep into her favorite music.

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