How does credit score affect personal loans?

Learn how ratings can affect interest rates & your application chances.

Learn how ratings can affect interest rates & your application chances.

Thinking of applying for a personal loan? You might be surprised to know that your credit score can actually influence the type of personal loan and interest rate you may be eligible for. Find out more about the relationship between credit scores and personal loans below:

How does your credit score impact your application?

Your credit score is calculated using your financial history held by credit reporting bureaus, which is documented in your credit report. Lenders use this score to assess how much risk there is involved in lending money to you. Your financial history consists of information such as:

  • How many accounts you have had, both open and closed 
  • The types of accounts you have e.g. revolving or instalment credit
  • Your credit limit on credit cards and personal loans. 
  • Your balance on any home loans
  • How well you’ve managed your repayments in the past 
  • Whether you’ve previously defaulted on any accounts or have any other black marks such as bankruptcy and court actions. 

If your credit score is lower, lenders consider you to be a higher risk. As a result, you might be denied a personal loan or only be eligible for one with a higher interest rate. On the other hand, if you have a good score, you are considered to be a better quality borrower. Lenders are generally more willing to offer a better interest rate or extend you credit if you have a higher credit score.


How else do lenders evaluate personal loan applications?

Today, big banks are no longer the only companies offering finance; there are now many other lenders in the market, like SocietyOne. As part of responsible lending practices, lenders don’t rely solely on your credit score to determine if your application will be approved or rejected. Other factors, such as your income, employment history and current employment status, can all play a part in a lender’s final decision. An approval or rejection can also be influenced by the lender’s risk appetite.

Using a personal loan to improve your credit rating

Applying for a personal loan will have an immediate impact on your credit score, as it will be recorded as an application for credit. However, it’s possible to use a personal loan to help build a good credit score. 

You can use a personal loan to consolidate existing debts and make it easier to manage and stay on top of repayments. If you successfully pay off a personal loan on time, it shows you’re reliable and trustworthy from a borrowing perspective. 

Lenders will look favourably upon applicants who have shown evidence that they can pay off debts of any kind. This can include credit card payments, car payments, personal loans and mortgages.

Since 2018, Comprehensive Credit Reporting (CCR) means your credit report will include more than just negative events; it will also document things like:

  • Limits on your credit cards and loan amounts
  • The types of credit you have applied for
  • Whether you have made repayments on time during the last 2 years.

Can it negatively affect my credit rating?

Just as a personal loan can help your credit rating, it can also have a negative impact if you fail to make repayments on time (as with any other type of credit). Some of the ways you can damage your credit rating include:

  • Failing to make payments on time
  • Payment defaults
  • Making too many loan or other credit enquiries over a short period of time

Keep up with repayments and ensure you pay on time every month and your credit rating is more than likely to improve over time. This applies to all types of credit and even utility and phone bills.

If you do find yourself in a position where you are unable to make a repayment, it’s important to contact your lender before your payment is missed. You may be able to come to an agreement for an alternative repayment arrangement, avoiding a negative impact on your credit profile.

Can paying off a loan early boost your credit score?

Paying off loans on time will undoubtedly boost your credit score, but what happens when you pay off a personal loan early? Paying out a personal loan early won’t boost your credit score, but there are other benefits such as reducing the total amount of interest you pay and demonstrating your ability to pay down a debt.

How can I find my score or get my credit report?

Knowing your credit score is a great way to stay in control of your finances. It’s easy to do as well. You can use SocietyOne’s free Credit Score service to check your rating and gain access to additional features and benefits.



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