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Are personal loans bad for your credit score?
Taking out a personal loan is not bad for your credit score in and of itself. However, there are several factors that come with taking out a new loan that could affect your overall credit score.
What Factors Into Your Credit Score
To understand how taking out a personal loan affects your credit score, you must first understand how the score is calculated. Roughly 35% of your overall credit score is based on your payment history. Thirty percent of your score is based on the total amount of debt you owe. Ten percent of the score is based on the number of credit lines that you have opened recently.
The last two factors are initially impacted by a new personal loan. Your total debt increases overall, and a new credit line is opened. The credit agencies take note of this activity and could possibly lower your credit score based on the new loan. However, your overall credit history has more impact on your credit score than a single new loan. If you have a longer history of managing debt and making timely payments, the effect on your credit score from a new loan is likely to be lessened.
Keeping a New Personal Loan From Damaging Your Credit Score
The easiest and best way to keep a personal loan from negatively affecting your credit score is to continue making payments on time and to pay off the debt within the terms of the loan agreement. A personal loan that you pay off in a timely fashion can actually have a positive effect on your credit score; it demonstrates that you can handle debt responsibly.