Personal loans are often marketed as a way to build credit. They can be—but only if you use them right. A personal loan can help your credit score, but it can also hurt it if you miss payments or borrow more than you can handle. Let's walk through exactly how personal loans affect your credit and when they're actually worth taking out.
Do Personal Loans Build Credit?
Yes, personal loans can build credit—but only if the lender reports your payments to the three major credit bureaus (Equifax, Experian, and TransUnion). Most banks and online lenders do report, but some don't. Before you apply, confirm that the lender reports to all three bureaus.
Once confirmed, your monthly on-time payments will show up on your credit report as positive account activity. This is one of the few ways to build credit quickly if you have no existing credit history. If you're not sure what counts as a good credit score, it helps to know the ranges before you start.
How Personal Loans Affect Each Credit Factor
Understanding how credit scores are calculated makes it easier to see why personal loans matter.
Payment History (35% of your score) This is the biggest factor, and personal loans directly impact it. Every on-time payment boosts your credit. Every late or missed payment tanks it. If you take a personal loan and pay on time for 12 months, you'll see real improvement. But if you miss even one payment, the damage can last years.
Credit Mix (10% of your score) Your credit score rewards you for having different types of credit: credit cards, auto loans, mortgages, and personal loans. A personal loan adds variety to your credit profile, which is a small boost. Learn more about why credit mix matters for your score.
Credit Utilization (30% of your score) This measures how much of your available credit you're using. A personal loan doesn't directly affect utilization like credit cards do, but if you use the loan to pay off credit card debt, you'll reduce your card utilization and see a score improvement.
Hard Inquiries (10% of your score) When you apply for a personal loan, the lender does a hard inquiry. This drops your score by about 5–10 points for a few months. It's temporary, but it's real. Find out how long a hard inquiry stays on your report.
Length of Credit History (15% of your score) Once you open a personal loan, it becomes part of your credit history. If you're building from zero, this helps.
When Personal Loans Hurt Your Credit
Missed or Late Payments If you miss a payment, your score will drop 100+ points. After 30 days late, it hits your report. This is the biggest risk of taking a personal loan.
Taking on Too Much Debt A personal loan is new debt. If you borrow $10,000 when you're already drowning in debt, you're making your financial situation worse, not better. Your credit score will improve in the short term (new account, payment history), but if you struggle to pay, the negatives outweigh the positives.
Multiple Applications in a Short Time Each application triggers a hard inquiry. If you apply for multiple personal loans at once, you'll get multiple hard inquiries, which drops your score more.
Defaulting If you default on the loan (stop paying entirely), the damage is severe and long-lasting. A defaulted personal loan can drop your score 150+ points and stay on your report for 7 years.
Personal Loan vs. Credit Builder Loan for Building Credit
A credit builder loan is designed specifically to help you build credit. Here's how it works: you borrow money (usually $500–$5,000), and the lender holds it in a savings account. You make monthly payments, and at the end of the term, you get the money back. You pay interest and fees, but you're essentially paying to build credit.
The Self Credit Builder Account is one of the most popular credit builder loans, with payments starting at $25/month. Read our Self review for details. CreditStrong's Magnum is another solid option—see our CreditStrong review.
A personal loan is borrowed money you actually use. You get the cash upfront and pay it back over time.
For pure credit building, a credit builder loan is better because: your monthly payments are smaller, the risk of default is lower, and you get your money back. Personal loans are better if you actually need the money for something. See the full comparison of credit builder loans vs secured credit cards to find the right tool for you.
Magnum by CreditStrong
Magnum by CreditStrong
MAGNUM helps you build large amounts of credit. Build $2,000 to $25,000 of credit history starting at just $30/mo. No hard credit pull. Reports to all 3 bureaus.
Loan Amount
$2,000 to $25,000
Term
45 months or 120 months
APR
11.11%
Admin Fee
$25
Monthly Fee
$30/mo to $110/mo depends on the plan
Credit Check
No
Average Score Increase
88+ points average FICO score increase
Should You Take a Personal Loan to Build Credit?
Take a personal loan if: you actually need money for something (debt consolidation, emergency expenses, a major purchase) AND you're confident you can pay on time every month. If you have bad credit, learn how to get a personal loan with bad credit.
Skip the personal loan if: you don't need the money, you're already struggling with debt, or you can't reliably make monthly payments.
If you're purely trying to build credit with no immediate cash need, a credit builder loan or a secured credit card is a smarter move. They cost less and have lower risk. The Self Visa® Credit Card is a secured card with high approval rates, and the Kikoff Credit Account requires no credit check. Read our Self review and Kikoff review for comparisons.
Personal loans do build credit—that part is true. But they're a tool, not a magic fix. Use them responsibly, and they'll boost your score. Misuse them, and they'll damage it. The choice is yours.
Kikoff Credit Account
Kikoff Credit Account
Everything you need to build your credit, right in one app. Build credit, lower debt, and unlock progress with tools that actually work.
Loan Amount
$750-$3,500 depends on the plan
Term
12 months
APR
0%
Admin Fee
$0
Monthly Fee
$5/month for Basic plan, $20/mo for Premium plan $35/mo for Ultimate plan
Credit Check
No
Average Score Increase
An avg increase of +86 points within a year with on-time payments
Ready to build credit safely? Whether it's a personal loan, credit builder account, or secured card, the most important thing is making every payment on time. Start small, build good habits, and your credit will follow.
Frequently Asked Questions
Will a personal loan hurt my credit score?
A personal loan will temporarily lower your score by 5–10 points due to the hard inquiry when you apply. However, if you make all payments on time, the long-term benefit to your credit far outweighs that small initial dip.
How much will a personal loan raise my credit score?
Most borrowers see a 20–40 point improvement after 6–12 months of on-time payments. The exact impact depends on your starting score, existing credit history, and whether the loan improves your credit mix.
Is a personal loan or credit card better for building credit?
Both help build credit, but they work differently. A personal loan is an installment loan with fixed payments, which improves your credit mix. A credit card is revolving credit that builds utilization history. Ideally, having both types strengthens your credit profile.
Can I get a personal loan with no credit history?
It's difficult but possible. Some online lenders specialize in borrowers with thin credit files. Credit builder loans are a better option if you have no credit history, since they're designed specifically for that situation.
