When you apply for a loan, you’re probably planning to accomplish something important. Whether it’s a personal loan, car loan, credit card, mortgage, student loan, or other credit, it can turn your most exciting plans into reality. Of course, when you apply for a loan you are giving a lender permission to access your credit report from a credit reporting agency. Let’s see what impact, if any, applying for a loan can have on your credit score and how receiving the loan can affect it too.
Will Applying for a Loan Hurt My Credit Score?
Depending on a person’s credit circumstances, applying for a loan typically lowers his or her FICO score by about 5-10 points. Why? When you are applying for a loan, your prospective lender will request a copy of your credit report from a credit reporting agency – Experian, Equifax, or TransUnion. There are two types of inquiries that lenders can make about your credit report:
- Hard Credit Inquiries: That request is known as a “hard inquiry.” Only the hard inquiries from the most recent 12 months can affect your credit score (by 5-10 points). The inquiries remain on your credit report for 2 years for people who read the report to see.
- Soft Credit Inquiries: There is also a “soft inquiry.” This type of inquiry frequently happens without your permission. For example, this kind of inquiry usually occurs when you are preapproved for a credit card, loan offer, credit limit increase, etc. Soft inquiries do not affect your credit score.
A hard inquiry indicates that you are seeking to take on additional debt. On the other hand, when you receive the loan, the much bigger effect of making your payments on time causes the negligible effect of the credit inquiry to become insignificant.
How a Personal Loan Affects Your Credit Score
Personal loans are popular for consolidating credit cards and other debts, often at better rates. Even though the initial application will cause a slight effect on your credit score, having the resulting personal loan can help your credit score significantly.
There are no personal loans that do not affect your credit score — either in a positive or negative way. So, make sure the repayment terms of your loan fit into your budget and pay all your agreed payments on time. That will significantly help drive up your credit score.
Having a personal loan also helps you create a good credit mix, which accounts for a full 10% of your FICO score.
Is Shopping for Lower Rates Good For You?
You do not need to fear the impact on your credit score from shopping around for a better interest rate. The key is to do all your research within a couple of weeks and no longer than about 6 weeks. When many hard inquiries are made within a short period for the same type of loan, those are counted by the credit reporting agencies as just a single inquiry. So, they collectively only have a nominal effect on your credit score.