While taking out a new personal loan can help you consolidate high-interest debt, improve your cash flow, or achieve another goal, it can also affect your credit score. For most borrowers, the application process has a small, temporary impact, while the account-opening process can cause a modest dip.

Thankfully, thoughtful borrowing, strategic repayment, and smart rate shopping can help you protect and even improve your credit over time, improving your chances of future approvals with competitive rates. Let’s dive deeper into what happens to your credit score when you apply for a personal loan and how you can protect your credit.

Key takeaway

Expect a small, temporary credit score drop when you formally apply for a personal loan. If approved, you might see another modest impact since the new account can affect your credit history length, credit mix, amount owed, and payment history. Manage your new account responsibly to help offset the early credit score impacts over time.

How does a new personal loan application impact your credit score?

When you submit a formal personal loan application, your lender will perform a hard inquiry. This involves reviewing your credit reports to determine if you’re a good risk to the lender and likely to repay your new loan.

According to myFICO, a hard credit pull typically only lowers your score by five points or less. It can stay on your credit report for one to two years and factors into the “new credit” component that makes up 10% of your FICO score.

Understanding hard vs. soft credit inquiries

While a hard inquiry is a normal process that occurs when a lender reviews your credit to make a lending decision, a soft credit inquiry is also common but works differently.

Many lenders, including BHG Financial, offer a prequalification process that lets you review potential personal loan terms with only a soft credit inquiry needed. Lenders also sometimes run this type of credit check for account reviews and promotional offers.

Unlike a hard credit inquiry, a soft credit inquiry doesn’t typically affect your credit score. Plus, it shouldn’t show up on your credit report to other lenders.

How does rate shopping affect your credit score?

Applying to several lenders over time can result in multiple hard inquiries on your credit report. As a result, you may see a larger temporary dip in your credit score.

However, the major credit bureaus typically treat multiple hard inquiries for similar accounts within a specific timeframe as a single inquiry, minimizing the credit score impact. According to Equifax, you usually get a 14- to 45-day rate-shopping window, depending on the credit score model your lender uses.

Example: If you apply for personal loans through three lenders over a week, you might see a single five-point-or-lower drop to your credit score. However, if you also applied for credit cards (revolving debt) during that time, multiple hard inquiries could ding your score.

How does opening a new personal loan account affect your credit score?

Opening a new personal loan can affect four key credit score factors: length of credit history, amount owed, credit mix, and payment history. While you may see a modest dip initially, your credit score can increase as you manage and repay the account responsibly.

Here’s a preview of these factors, which we’ll discuss in more detail below:

Credit factor	Short-term effect	Long-term effect
Length of credit history	Slight decrease	Builds gradually as the account gets older
Credit mix	May improve	Demonstrates responsible use of installment credit
Amount owed	May drop	Positive as the credit utilization decreases
Payment history	Neutral at opening	Strongly positive with on-time payments

Length of credit history

The length of your credit history accounts for 15% of your FICO score. When you open a new personal loan account, your average account age can be reduced, slightly lowering your credit score. However, the specific impact can vary based on how old your other accounts are and when you last used them.

As your new personal loan account ages, the initial credit score effect should fade away if you don’t open or close other accounts. This is especially important to consider if you’re using the personal loan to consolidate existing debts; closing out those consolidated accounts can lower your credit score temporarily.

Credit mix

Your credit mix makes up 10% of your FICO score. It refers to the types of accounts you have, such as mortgages, installment loans, and credit cards.

If your new personal loan diversifies your debt, it might slightly improve your credit score, since lenders will see that you can responsibly manage another type of debt. If you have existing installment loans, you might not see an impact on this area.

Amount owed

The amount of debt owed and used compared to your total available credit limits accounts for 30% of your FICO score. Opening a new personal loan can lead to an initial drop in this area since you’ll owe 100% of that loan balance.

However, paying down the balance can help your credit score over time, depending on how you manage other accounts. Additionally, consolidating other debt with your new personal loan might improve your credit utilization if you minimize other balances moving forward.

Payment history

When you first open your personal loan, your payment history for the new account is a blank slate. That means you’ll see an initially neutral impact on the payment history component of your FICO score, which accounts for 35% of it.

Once repayment begins, making on-time payments is good for your credit score. In contrast, Experian reports that missed loan payments can stay on your credit report for up to seven years, damage your credit, and result in potential fees.

How to protect your credit when taking out a new personal loan

Protecting your credit starts before you apply and continues through repayment. Understand the key different credit score components and use these best practices to maintain and even improve your credit score:

Review your credit reports: So that lenders see the most up-to-date information, look for credit report errors, such as incorrect account balances or statuses, before applying for the personal loan. Dispute any inaccuracies using the Consumer Financial Protection Bureau’s guidance.
Apply strategically: Begin with soft-pull prequalification whenever possible and submit formal applications within the 14- to 45-day window to minimize the effects of hard inquiries.
Choose your loan wisely: Borrow only what you need and choose a payment schedule you can comfortably afford to keep your debt-to-income ratio healthy.
Avoid other new accounts: Don't open other new credit accounts outside your rate-shopping window, so you can limit additional hard inquiries and preserve the average age of your accounts.
Make on-time payments: Set up autopay or payment reminders to prevent late or missed payments once your personal loan is open.
Manage all debts responsibly: Pay all other bills on time, keep your credit utilization on revolving accounts under 30%, and avoid closing old accounts without a plan.
Manage all debts responsibly: Pay all other bills on time, keep your credit utilization on revolving accounts under 30%, and avoid closing old accounts without a plan.

Why choose BHG Financial for no-impact prequalification

As a high-income borrower, you need custom solutions built around your needs, such as improving cash flow, lowering your cost of debt, or funding a big purchase.

BHG Financial lets you prequalify for a personal loan with zero credit score impact,¹ so you can compare options and get quick insights into potential loan amounts, rates, and terms before submitting a formal application. Here’s what you can expect from us:

Generous loan amounts of up to $250,000² for qualified borrowers
Flexible terms of up to 10 years^2,3 to fit your budget and cash flow needs
Competitive fixed interest rates for predictability
Transparent application process, with approval decision in as soon as 24 hours and funding in as little as five days⁴
Dedicated support from the application through funding stages

If you'd like to learn more about our personalized solutions, speak with a BHG loan expert today or get a hassle-free payment estimate online in seconds.⁴

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^† This is not a guaranteed offer of credit and is subject to credit approval.

FAQs about personal loans and credit scores

Does applying for a personal loan hurt your credit score?

When you apply for a personal loan, you’ll typically see a small drop of up to five points due to the hard credit check your lender runs. However, this negative effect is temporary.

How long do personal loan inquiries stay on my credit report?

Hard inquiries generally remain on your credit report for two years, but their impact on your credit score usually fades after about 12 months.

Can multiple personal loan applications lower my credit score more?

Spreading out your personal loan applications can compound the effect on your credit score. If you stick to applying within a short rate-shopping window (typically 14 to 45 days), many scoring models treat multiple inquiries for the same loan type as a single inquiry.

Do preapprovals or prequalifications affect my credit score?

Since a prequalification involves a soft credit check, it shouldn’t affect your credit score or appear on your credit report. Some preapprovals, such as for mortgages and auto loans, require hard credit checks, which show up on your credit report and affect your score.

Not all solutions, loan amounts, rates or terms are available in all states.

¹ There is no impact on your credit for applying. For personal loans, a complete credit history, which will appear as an inquiry on your credit report, will be performed upon acceptance and funding of the loan and may impact your credit.

² Terms subject to credit approval upon completion of an application. Loan sizes, interest rates, and loan terms vary based on the applicant's credit profile. Not all applicants will qualify for the lowest rate.  

³ Personal Loan Repayment Example: A $60,000 personal loan with a 7-year term and an APR of 17.06% would require 84 monthly payments of $1,191.38.

⁴ This is not a guaranteed offer of credit and is subject to credit approval.

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No application fees, commitment, or impact on personal credit to estimate your payment.

For California Residents: Personal loans made or arranged pursuant to a California Financing Law license - Number 603G493.