Here's What Happens to Your Credit Score When You Take Out a New Loan

There may come a point when you need to sign a new loan. Maybe you’re tapping your home equity to renovate your kitchen. Or maybe you need to borrow money to fix your car. 

When you apply for a loan, lenders will generally need to do a hard inquiry on your credit report so they can see what your borrowing history looks like. That will help them determine whether you’re a strong loan candidate or not.

In many cases, taking out a new loan will only result in a hit to your credit score of under 10 points. But in some cases, your score might drop a bit more. However, how you repay your loan will ultimately have the greatest impact on your credit score. 

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The initial hit to your credit score might be modest

One reason it’s so hard to maintain a perfect credit score is that any time you apply for a new loan or credit card, a hard inquiry is done that could drag your score down by a few points. In some cases, though, signing a new loan could have more of an impact on your credit score because it changes the length of your credit history. 

Having long-standing loans and accounts on your credit report sends a positive message to lenders, whereas newer loans can sometimes work against you temporarily. That might seem like an annoying thing, but unfortunately, it’s one of the complexities of credit scoring. But even then, the hit may not be too substantial. 

FICO reports that a borrower with a starting credit score of 793 might see their score drop to anywhere from 790 down to 770 after signing a $5,000 loan. Clearly, going from a 793 to a 790 is no big deal. But going from a 793 to a 770 is more upsetting because that’s a more substantial drop. That said, even a 23-point drop isn’t such a huge deal, especially when your credit score is in good shape to begin with. 

The way you repay your loan will have a greater impact

While taking out a new loan might change your credit score to a smaller degree, your payment history carries more weight than any other factor when calculating your credit score. And so if you make all of your loan payments on time, that could help your score improve following the hit it takes in the course of your loan application.

But if you fall behind on your loan payments, you could cause a lot more damage to your credit score than what you caused by signing that loan in the first place. Once you’re 30 days late paying a debt, the damage can be extreme. 

A 30-day late payment could drag a credit score of 793 down to a 710, says FICO. That’s an 83-point drop. And a 90-day late payment could send a score of 793 down to 660 — in other words, a 133-point drop. Yikes. So do try your best to keep up with your loan payments. And if you accidentally miss one, aim to make that payment as soon as you can.

But try not to focus too much on that initial hit to your credit score. Chances are, it’ll be modest and something you can recover from somewhat easily.

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