Is taking out a loan bad for your credit?

Is Taking Out a Loan Bad for Your Credit?

Applying for personal loans, like other credit applications, can temporarily lower your credit score. Lenders perform hard inquiries, which are recorded on your credit report and cause a small, but usually temporary, decrease in your score.

How Hard Inquiries Affect Your Credit Score

When you apply for a loan, the lender will pull your credit report from one or more credit bureaus. This is known as a hard inquiry. Hard inquiries stay on your credit report for two years, but they only impact your score for the first year.

The impact of a hard inquiry on your credit score is relatively small. Typically, it will only lower your score by a few points. However, if you have a thin credit file, a hard inquiry could have a bigger impact.

The Impact of Taking Out a Loan

In addition to the temporary impact of a hard inquiry, taking out a loan could also have a long-term impact on your credit score. If you make your payments on time and in full, your loan will help you build credit. However, if you miss payments or default on your loan, it could seriously damage your credit score.

Should You Avoid Taking Out a Loan?

Whether or not you should take out a loan depends on your individual circumstances. If you have a good credit score and you need to borrow money for a legitimate purpose, a loan could be a good option for you. However, if you have a poor credit score or you are not confident that you can make your payments on time, you may want to consider other options.

Other Ways to Build Credit

If you are trying to build credit, there are a number of other things you can do besides taking out a loan. Here are a few tips:

• Pay your bills on time, every time.
• Keep your credit utilization ratio low.
• Don’t open too many new credit accounts in a short period of time.
• Become an authorized user on someone else’s credit card.
• Get a credit-builder loan.

Building credit takes time and effort, but it is worth it in the long run. By following these tips, you can improve your credit score and qualify for better interest rates on loans and other forms of credit.