People often take out personal loans to help them buy cars, homes, start their own businesses etc. Sometimes people also use these loans to pay off debts or to cover emergencies that may not be covered by insurance.
What does this have to do with your credit score? A personal loan affects your credit score as it is a form of debt that will show up on your credit report. It will lower the amount of credit you have available, and it will affect your payment history as well as your amount of debt.
Since a personal loan is a type of credit-based loan, it will affect the borrower’s credit score. A personal loan can affect your credit score in two ways:
It will either increase or decrease the borrower’s total debt to income ratio. If this ratio goes up, it can reduce the risk associated with lending to that person. If this ratio goes down, it can increase the risk associated with lending to that person.
Be careful when comparing the APRs of fixed-rate loans with the APRs of adjustable-rate loans, or when comparing the APRs of different adjustable-rate loans.
The amount of debt on any one account will also affect the borrower’s credit score by increasing or decreasing their total debt-to-credit-limit ratio. If this ratio goes up, it can reduce the risk associated with lending to that person. If this ratio goes down, it can increase the risk associated with lending
While taking on an installment loan is not in itself going to boost your score a whole lot, using a personal loan to pay off revolving debt will cause the most noticeable increase in your credit score. Once your cards are paid off, keep your spending under 10% of your available credit and notice what a difference it makes.