How Paying Off Personal Loans Can Help Your Credit

A common question is whether paying off personal loans affect credit scores? The answer is yes, paying off personal loans affects credit scores positively, but making your payments on time is also beneficial. Let's explain.

What Is a Personal Loan?

A personal loan is a contract that outlines how much you are borrowing, how long you are borrowing it for, what the interest rate will be, and what your payment will be. It is this agreed upon monthly payment you will pay each month.

Paying of Personal Loans Affect Credit Scores


When you pay off a personal loan you show that you are a responsible borrower. Paying of a personal loan also establishes that you are a low risk borrower. Paying off a personal loan can help you enjoy a quick credit score pick me up.

Using Personal Loans to Pay Off Other Debt


If you are using your personal loan to clear up other debt, initially there will be no change in your credit score because your debt load hasn't changed; only who you owe the money to has changed. However, over time as the debt is either paid down or paid off, you will enjoy the benefits of that act on your credit score.

If you have bad credit and you are using personal loans for a credit score boost, you can benefit either by making the payments on time for the length of the term, or by paying off the personal loan.

For example, let's say you have $10,000 in credit card debt. You get a personal loan for that $10,000 from your bank. Initially there will be no change in your credit score because your debt ratio has not yet dropped. But when the $10,000 is paid off you will see an improved credit score.

The Payments of Personal Loans Affect Credit Scores

While paying of personal loans improves credit scores, making the payments of that personal loan is also beneficial, showing you can honor the commitment you made to the lender. Lenders want to see if you understand what you signed up for and take your commitment seriously.

The ability to stick to the agreement and make your payments on time every month will show you the rewards of how personal loans improve credit scores.

For example, you borrow $10,000 for 24 months and your payment is $440 a month. By making that $440 payment every month for the full 24 months your credit score will enjoy an increase.

Paying Late on Personal Loans Affects Credit Negatively

Being in a personal loan contract is beneficial as long as you make your payments on time, but if you pay late or miss making a payment your credit score will be negatively affected.

Get the Most From Personal Loans and Credit Scores


The ability to stick to the agreement and make your payments on time every month will show you the rewards of how personal loans improve credit scores, however the ability to pay off personal loans benefits credit scores too. A personal loan is beneficial to your credit score when you meet your obligation.

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