Using a personal loan to boost credit score: Does it work?

Using a personal loan to boost your credit score can work, but it requires careful management. Learn how loans affect your credit mix, utilization, and payment history.

Written by Holly Johnson

Financial Expert

Edited by Ashlee Valentine

Associate Editor

Improving a low credit score can feel like an uphill battle, especially if past mistakes or limited credit history are holding you back. When on-time payments and responsible credit use haven’t moved the needle, it’s natural to look for other ways to make progress. One strategy to consider is using a personal loan to improve your credit score.

Personal loans can affect your credit score in both positive and negative ways. They can help by adding an installment account to your credit mix, lowering credit card balances through debt consolidation, and creating a record of consistent, on-time payments. At the same time, applying for a loan triggers a hard inquiry, and taking on new debt can hurt your score if you don’t carefully manage the loan.

This article takes a closer look at whether personal loans hurt your credit, or help it, or both — and when this strategy might make sense.

How credit scores work and why they matter for personal loans

Before you decide on a personal loan to increase your credit score, you should understand how scores are calculated in the first place. Most personal loan lenders rely on FICO credit scores, which are designed to predict how likely you are to repay borrowed money on time. Each part of your credit profile plays a role, but some factors matter far more than others.

Payment history (35%)

When it comes to using a personal loan to improve credit score, payment history carries the most weight. This factor measures whether you’ve paid past credit accounts on time, including credit cards, loans, and other obligations. Late payments, delinquencies, and accounts in collections can significantly drag down your score, while a consistent record of on-time payments builds trust with lenders.

Credit utilization (30%)

Credit utilization measures how much of your available revolving credit you’re using, mainly on credit cards. Using a high percentage of your credit limits can signal financial strain, even if you pay on time. Lower utilization (typically below 30% of your available credit limits) is viewed more favorably and can lead to a higher score.

Length of credit history (15%)

This factor looks at how long you’ve been using credit, including the age of your oldest account and the average age of all your accounts. A longer credit history gives lenders more data to evaluate your habits, which is why opening and closing accounts frequently can sometimes work against you.

Credit mix (10%)

Credit mix refers to the variety of credit accounts you have, including credit cards (revolving credit) and loans (installment credit). While this factor has a smaller impact, having multiple types of credit can slightly boost your score, especially if all accounts are managed responsibly.

New credit and inquiries (10%)

Every time you apply for new credit, a hard inquiry appears on your credit report. Too many inquiries in a short period can cause a temporary dip in your score, typically by a few points. That said, the impact should be small and short-lived if you don’t apply for too many new accounts.

What credit score is needed for personal loan approval?

When it comes to minimum credit standards for personal loans, this depends a lot on the loan company. Many lenders set a minimum credit score of around 580 for personal loans, which is at the bottom of the “fair” credit range. However, all borrowers with fair credit (scores from 580 to 669) can expect limited options and higher costs.

A good credit score (670 to 739) usually opens the door to more lenders and better rates, while borrowers with very good to excellent credit (scores of 740 and above) can qualify for the lowest interest rates and most flexible terms.

Beyond these rules of thumb, not all lenders view credit scores the same way. Traditional banks often have stricter requirements, while online lenders and credit unions may take a more flexible approach by looking at income, employment history and overall debt levels in addition to your score. This variation is why some borrowers can qualify for a personal loan even if their credit isn’t perfect.

The impact of personal loans on your credit profile

Taking out a personal loan can change your credit profile in both the short and long term. Whether those changes help or hurt depends largely on how the loan is used and how well it’s managed after you’re approved.

How applying for a personal loan affects your credit score initially

When you apply for a personal loan to improve your credit score, the opposite of what you want may happen at first. This is normal and usually temporary, but it’s important to understand why it happens.

Hard inquiry impact: Most personal loan applications result in a hard credit inquiry on your credit reports, which can lower your credit score by roughly five to 10 points. The exact impact varies based on your overall credit profile and how many recent inquiries you already have. This drop typically fades within a few months as long as no other negative activity appears on your credit reports.
Impact of adding a new account: Getting a new loan also adds a fresh account to your credit reports. This can slightly reduce the average age of your accounts, which may cause a small, short-term score decrease. However, the effect is typically minor compared to the potential benefits of responsible repayment over time.

Long-term benefits for credit building

Over time, personal loans can help your credit score if managed responsibly. While the initial impact of applying for a personal loan may be negative, the long-term credit impacts tend to be positive.

Payment history improvement potential: On-time loan payments are reported to the credit bureaus each month, and this helps strengthen the most important credit scoring factor — payment history. A personal loan can be especially helpful for borrowers with past late payments or thin credit files, since consistent payments add positive data that wouldn’t be reported otherwise.
Credit utilization ratio impacts: If you use a personal loan to pay high-interest credit card debt, your credit utilization ratio may drop significantly. Since credit utilization is the second most important factor in a FICO score, this factor can also positively impact your credit.
Credit mix diversification: Personal loans are installment accounts, which differ from revolving accounts like credit cards. Adding an installment loan to a credit profile that previously only included credit cards can improve your credit mix, which is a smaller but still meaningful credit scoring factor.

Credit score improvements don’t happen overnight, but many borrowers who use a personal loan to improve their credit score see gradual gains within three to six months of on-time payments and reduced credit card balances.

Pros and cons of using a personal loan to improve your credit score

Using a personal loan to build credit can be a smart move in the right situation, but it isn’t a guaranteed win for everyone. Like most financial strategies, this move comes with clear advantages as well as real risks. Understanding both sides can help you decide whether this approach fits your current credit goals and financial situation.

Pros

Consolidate high-interest debt: One of the biggest benefits of this strategy is the ability to roll multiple high-interest credit card balances into a single new loan. Using a personal loan for debt consolidation can simplify repayment, reduce the amount of interest you pay over time, and lower your credit utilization — all of which can support credit score improvement.
Qualify for lower monthly payments: Depending on the loan term and interest rate, a personal loan may offer a lower monthly payment than what you’re currently paying across several credit cards. More manageable payments can make it easier to stay on track, which is critical for building a positive payment history.
Potential for better loan options in the future: Making on-time payments on a personal loan can strengthen your credit profile over time. As your score improves, you may qualify for lower interest rates, higher credit limits, or more favorable loan terms down the road.

Cons

Initial impact to credit: Applying for a personal loan results in a hard inquiry and the addition of a new account on your credit reports, which can cause a small, temporary drop in your credit score. While this dip is often short-lived, it’s something to consider if your score already needs work.
You’re taking on new debt: A personal loan adds to your overall debt load. If the loan is used without a clear repayment plan — or if credit cards are run back up after consolidation — it can leave you in a worse financial position than where you started.
Potential for high interest rates: Borrowers with fair or poor credit may only qualify for personal loans with high interest rates. The cost of borrowing can even outweigh the potential credit benefits in some cases, especially if the loan isn’t used to pay off debt at even higher rates.

Do personal loans hurt your credit or help it?

Personal loans can hurt your credit in the short term but help your credit over time if you manage them responsibly.

Using a personal loan to improve your credit score can be an effective strategy, but it’s not a guaranteed fix. The key is careful planning, realistic budgeting, and a commitment to making every payment on time. If those pieces are in place, a personal loan can help you build stronger credit and qualify for better financial options in the future.

This strategy makes the most sense if you have high-interest credit card debt to consolidate, a steady income, and a clear plan to make every payment on time. It can also be helpful if your credit profile is thin, and you could benefit from adding an installment loan to the mix.

On the flip side, a personal loan could make things worse if you’re already struggling to keep up with monthly bills. The same can be said if you know you’ll be tempted to use newly freed-up credit card limits to spend more. Before moving forward, it’s important to run the numbers, understand the total cost of borrowing, and assess your ability to manage debt responsibly.

Frequently asked questions

Does paying off loans help credit?

Paying off loans can help your credit over time, especially if a loan is paid back according to the original terms. Successfully paying off a loan strengthens your payment history and reduces your overall debt.

Will getting a personal loan help my credit score?

A personal loan can help your credit score if it’s used strategically and paid on time. That said, results vary based on your starting credit profile and whether you responsibly manage the loan.

Do personal loans hurt your credit score?

Personal loans can hurt your credit score in the short term due to a hard inquiry and the addition of a new account to your credit reports. However, the impact is typically positive overall if you make consistent, on-time payments and avoid taking on additional debt you can’t afford.

About the author Holly Johnson

Holly Johnson is a professional writer who has been covering personal finance, credit cards and loyalty programs for more than a decade. She is passionate when it comes to explaining the ins and outs of various programs and financial products to consumers, as well as how they can make the most of the money they work hard to earn. Johnson is also the co-author of “Zero Down Your Debt: Reclaim Your Income and Build a Life You’ll Love,” published in 2017. She lives in Indiana with her husband and children.