How does a personal loan affect credit score?

A personal loan is a type of installment loan. How it affects your credit score depends on how you use the loan. There are ways in which a personal loan can decrease your credit score and also increase it. 

You may see a dip in your credit score when you apply for a personal loan because of the hard inquiry performed on your credit file. Your score may also drop because the average age of your credit accounts reduces whenever you open a new account. Both these effects are short- term and you can easily recover these points in a few months with regular monthly payments. The length of your credit history makes up 15% of your FICO® Score and a hard pull can cause a drop in your score by five to ten points. 

A personal loan can impact your credit score positively by improving your credit mix, which makes up 10% of your FICO® Score. Additionally, if you intend to consolidate your credit card debt with a personal loan, that move can greatly benefit your credit score. 

1. You can pay off all or most of your credit card balances. This impacts your payment history positively. 35% of your FICO score is dependent on timely payments. So if you have made any late payments or missed payments, a personal loan to pay off the outstanding bills can help repair your score. 
2. Your credit utilization improves considerably. Your credit utilization is one change that reflects in your credit score almost immediately (as soon as it is reported). Credit utilization makes up 30% of your FICO Score. Paying off these bills increases the amount of available credit and can greatly improve your score. 
3. Your credit mix improves. Since a personal loan is another type of installment loan, it adds diversity to the types of credit accounts that are active in your name. If you have revolving credit accounts through your credit cards, auto loan, and mortgage loan, a personal loan can further add to the diversity as long as you make payments on time and are able to manage the other installment loans you have ongoing. 

Keep in mind though that these credit-building steps will only be effective if you stick to a strict repayment schedule and do not add any extra debt to your already existing dues. Weigh your options carefully to make sure you are able to balance your debt, income, and available bank balance for daily expenditures. If you take on a personal loan and end up getting into more debt with higher interest rates and miss payments, it will only hurt your financial health, including your credit score.