Do Personal Loans Hurt Your Credit Score?
Obtaining a personal loan can affect a person's credit score. According to MyFICO.com, new credit makes up 10% of a FICO® Score. When you apply for new credit, inquiries remain on your credit report for two years. FICO Scores only consider inquiries from the last 12 months.
When applying for new credit, an inquiry is placed on your credit report. That means, for instance, if you're trying to get a new credit card, the lender will inquire into your credit report from one of the three major credit agencies. Depending on the other factors in your report, this inquiry can lower your score by a few points.
In the beginning, obtaining a personal loan can lower your credit score, however, as long as you make on-time payments and pay back the loan in full, obtaining a personal loan can actually improve your credit score.
At Credit Union of Southern California (CU SoCal), we’ve provided low-interest personal loans to Southern Californians for over sixty years.
Even if your credit history isn’t perfect, don’t worry, because unlike a traditional bank, we don’t think that your credit score tells the whole the story. Come in and talk to us and let’s see what we can do!
Call CU SoCal at 866.287.6225 to schedule a free no-obligation personal loan consultation, or apply online today!
What Is a Personal Loan?
A personal loan is a type of loan that provides the borrower with money that can be used for any personal expense, such as home renovations, paying off debt or medical bills, college tuition, a wedding, and pretty much any other payment need you can think of.
Personal loans are available from credit unions or banks and typically have a fixed interest rate. Many people choose to make large purchases, such as new appliances or furniture, using a personal loan because the interest rate often is lower than the interest rate charge by credit cards.
Find out more by reading, “What are Personal Loans?”
What Can You Use a Personal Loan For?
Personal loans can be used to fund a wedding, buy furniture or new appliances, renovate your house, pay hospital bills, pay for college tuition, take a vacation, or any number of other expenses. With a personal loan, the money you receive can be used any way you’d like. For more details, read, “What Can I Use a Personal Loan For?
How Does a Personal Loan Affect Your Credit Score?
Applying for any loan, including a personal loan, will affect your credit score resulting in a decrease and increase. It’s important to note that credit scores fluctuate daily as we add and pay off the various debts we all have.
There are three specific times when a personal loan most affects a person's credit score:
Applying for a Personal Loan
On application the lender will do a “hard credit pull,” which will reduce your credit score. Getting approved for new credit also affects your length of credit history by reducing the average amount of years, also lowering your credit score. These reductions in score aren’t bad, they’re just important to be aware of. On the other hand, MyFICO tells us that if the new loan helps diversify the types of accounts you currently have, this can increase the "credit mix" factor of your credit score. It shows lenders you can obtain and manage different kinds of credit, which can lower their risk of lending you money.
Making Monthly Payments
Simply stated, making on-time monthly payments is the most critical aspect of having any loan. Paying on-time will always increase your credit score. Late payments or missed payments will quickly decrease your credit score, result in late payment fees from the lender, possible interest penalties, and possibly ruin your credit. If you fail to make payments on a secured personal loan, you could lose your collateral (such as a house or car).
Closing the Account
Paying off your personal loan and closing the account will cause a slight decrease in credit score, as it changes your credit mix and length of credit history percentages. However, having successfully paid off a personal loan will increase your creditworthiness and ability to borrow money in the future.
Where to Get a Personal Loan
There are three main options when it comes to where to get a personal loan:
Traditional banks tend to have higher credit score and income requirements than credit unions. If you happen to have bad credit, getting a good rate on a personal loan from a bank could be challenging. If you need the money in a rush, banks may take longer to release funds, so ask how long the approval and funding process will take before you apply.
As a not-for-profit organization, credit unions reinvest profits back into the organization, so Members benefit from lower interest rates loans. Typically, there are no fees or lower fees than you’d find at a bank. CU SoCal does not charge fees on personal loans.
While numerous online lenders offer personal loans, they can’t offer the personalized Member service of a credit union or local bank. They may also have higher interest rates. Be sure to compare rates and fully understand the terms of the loan.
For more details, read “Where Can I Get a Personal Loan at a Good Rate?
Personal Loan Requirements
Getting a personal loan starts with completing an application with the lender of your choice. All lenders will look at a number of factors to determine your eligibility to borrow. These include your credit score and credit history, proof of income (such as a W-2 or 1099), and looking at your current debt (including other loans, such as a mortgage or car).
The lender will use these items to determine your debt-to-income ratio. Your debt-to-income ratio
is all your monthly debt payments divided by your gross monthly income. This number is one way lenders measure your ability to manage the monthly payments to repay the money you plan to borrow.
Depending on the type of personal loan you are applying for, you may be asked to “put up collateral.” Personal loans can be secured
. A secured loan requires the borrower to pledge an asset such as property, the balance of a deposit account, or a car to “secure” the loan.
If the borrower does not pay the loan in full the lender can take possession of the asset that was used as collateral. A mortgage loan and a vehicle loan are both examples of secured loans.
Credit Union of Southern California offers secured personal loans that can be secured using the borrower’s Savings or Share Certificate (the credit union version of Certificates of Deposits) as collateral. This convenient loan lets Members borrow up to a certain percentage of their account balance in the form of a loan.
No matter which type of personal loan you apply for, having a good credit score will be instrumental in obtaining a personal loan with a good interest rate.
Need to Improve Your Credit Score? Try a Credit Builder Loan
For individuals who need to establish or build credit, CU SoCal offers a Credit Builder Loan. The Credit Builder Loan is specifically designed for those who have less than optimal credit history, or no credit history at all, and who have time to work on building their credit. It comes with a 12-month term and no application fee. Learn more about CU SoCal's Credit Builder Loan
Don’t let a less than perfect credit score stop you from getting a personal loan. Read “How to Rebuild and Improve Your Credit Score,”
for valuable tips on improving your credit.
How to Apply for a Personal Loan
Applying for a personal loan is easy. You’ll need to complete an application with your lender of choice. The lender will ask permission to look at your credit score and provide you with a list of documents needed, such as your identification, social security number, proof of income, etc.
Credit unions and banks both will have limits to how much you can borrow with a personal loan, so be sure to ask about the maximum amount available to you, and the interest rate, monthly payment amount, and other loan terms.
For more details read, “Where Can I Get a Personal Loan at a Good Rate”
and “How Hard Is it to Get a Personal Loan?
Repaying Your Personal Loan
Taking out a loan of any kind is a huge financial responsibility. Once you apply for and get approved for your personal loan, you will need to make on-time monthly payments of the amount specified in the loan payment terms.
Repaying your personal loans on-time is critical to improving your credit score, and setting up automatic payments from a linked checking or savings account is usually a good idea because it ensures your payments will be received on-time.
If you eventually find that you have extra cash on-hand and want to pay-off the remaining balance of the loan, doing so can save you money on monthly interest.
Some lenders charge a prepayment penalty on loans, meaning that if you pay-off the remaining balance before the designated loan term ends, you will have to pay a fee to the lender. Before you sign for a personal loan, be sure to ask if there is a pre-payment penalty. If your loan doesn’t have a prepayment penalty, then paying it off is a good idea if you have the money to do so.
The Credit Union of Southern California does not charge a prepayment penalty on personal loans.
Paying bills on-time and establishing a clean credit history demonstrates to lenders that you are a good loan candidate which will open the door to lower interest rates on loans and increase your buying power.
CU SoCal Personal Loans
Here are some of the reasons why Members love CU SoCal personal loans:
- Amounts available from $500 to $30,000
- No Repayment Penalty
- No Application Fee
- No Funding Fee
- Terms Up To 120 Months For Lowest Possible Repayments
Why Savvy Consumers Choose CU SoCal
For over 60 years, Credit Union of Southern California has been proudly serving the Southern California community. We provide our Members with checking, savings, personal loans, auto loans, and other loan products with quick pre-approvals, no application or funding fees, and other unique advantages.
We are known throughout the area for our excellent Member service and we are proud to be serving the community where we work and live.
Apply for a CU SoCal Personal Loan Today!
Please give us a call today at 866.287.6225 to schedule a no-obligation consultation with one of our personal loan representatives.
APPLY FOR A PERSONAL LOAN TODAY!