personal loan credit score

Do Personal Loans Hurt Your Credit? Understanding the Impact on Scores

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Personal loans can be a great financial tool to help you achieve your goals.

All around the country, people use them to finance vehicles, pay for unexpected expenses, or purchase large items.

But sometimes, people worry about what taking out a personal loan might mean for their credit score.

What is a credit score?

Put simply, a credit score is an indication for lenders of how likely you are to repay money that you borrow.

It’s affected by things like your past borrowing history and your payment of regular bills.

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What is a good credit score in New Zealand?

Credit scores range from zero to 1000 or 1200, depending on which credit bureau you’re accessing your credit report from. There are three main providers in New Zealand: Centrix, Equifax and Illion, now owned by Experian.

The higher your rating, the better.

For Centrix, a “good” score might be from about 650 to 770. For Equifax, between about 620 and 720 is good.

For both Centrix and Equifax, a score of 500 or lower is generally seen as low.

The relationship between personal loans and credit scores

Personal loans and credit scores each have an effect on the other.

When you take out a personal loan and pay it back, it can improve your credit score because it builds your history of making payments on time.

New Zealand has a system of comprehensive credit reporting, which means that payments that you make are recorded on your credit score, as well as any you miss.

But if you take out a loan and don’t pay it back or are late with payments, it can affect your score negatively.

Did you know that if you submit a loan application with multiple lenders at the same time, it can impact your credit rating? When applying for a loan, it’s important to protect your credit score. At better finance™️, we take this responsibility seriously, and our initial enquiry to help us determine a suitable lender to submit your application to does not impact your credit rating. Your credit score can also affect the sort of interest rates you’re offered when you apply for a loan – sometimes, people with a better credit history can access lower rates. It can also affect a lender’s willingness to lend to you.

How do personal loans affect your credit score?

As you can see, a personal loan can have a positive or a negative effect on your credit history.

Positive

When you make your personal loan repayments on time, and that’s reported to the credit bureaus, it helps improve your credit score.
Making your payments on time each month helps build a positive payment history and proves that you can repay debt.
A personal loan can help to diversify your credit mix by adding instalment credit to your report.
Showing that you can successfully manage a mix of different types of credit can boost your credit score.

Negative

Applying for a personal loan can temporarily lower your credit score a bit due to the “hard” inquiry on your credit report. better finance™️’s process helps limit the impact on this.
Missed payments can negatively affect your credit score.
Added debt from a personal loan adds to the “amount owed” category of your credit score.
A new personal loan could make your credit age younger, which could lead to your score dropping. Credit age refers to how long you’ve had your loans.

How to use personal loans responsibly to protect your credit score

Check your loans are necessary and affordable

Don’t take out loans that are bigger than you can afford to pay back comfortably. It may be a good idea to consider how you would cope with the loan if your circumstances were to change, particularly if the loan will be paid over a longer period of time.

Explore the loan terms available

We can help you to look at the loan terms on offer and find a suitable option for you.

Manage loan repayments

While you have a personal loan, making the repayments on time will need to be a priority. You can set up your payments so they are close to your payday, and you’ll know there should be money in your account to cover them. Make the payments a priority so that you develop a history of paying your loan off on time.

Conclusion

A personal loan does not need to have a negative impact on your credit score. In fact, in some cases, it can help build your credit history in a positive way.

As with any decision, it makes sense to be careful about taking out a personal loan and only choose one that is suitable for your individual circumstances.

If you have questions or would like to discuss your options in greater detail, get in touch with the team at better finance™️. We are here to help.