A personal loan can be used for anything and it is a real lifesaver sometimes. But when you get one, your credit score fluctuates. Here’s everything you need to know.
What are those stages?
When you apply for the loan
Before actually getting a personal loan, you need to apply in order to get approval. Lenders will base their decision on your credit score, so the higher it is, the better conditions you might get.
They do this by performing a hard-check, which means you give permission to a certain company (usually, the potential lender) to check your credit history. Every time a lender triggers a hard inquiry, your credit score will temporarily decrease.
When you get your loan
Once you get your personal loan, you increase your credit mix, which is basically 10% of your total score. So at this stage, your score might get a little boost. But as you are also increasing the amount of debt you owe, a personal loan could also cause it to drop.
An important thing to keep in mind when choosing a lender is that they report your repayment history to the three major credit bureaus. Lenders are not required to report your payment history, and if they don’t, then you won’t be able to show that you worked hard and never missed a payment.
When you repay your loan
Before taking a loan, you need to make sure you can pay for it. Depending on your credit score, your loan conditions might be different. If you have low credit score, you might have to pay higher interest rates, so make sure you include that in your budget.
Keep in mind that your credit score has different factors, but the most important one (around 35%) is your payment history. If you miss one single payment, your score can drop dramatically.
If you are diligent when making payments, it will show, too.