Most Personal Loan Borrowers See Higher Credit Scores

Borrowing, Credit Rating, Personal Loans & Lines of Credit

Can you raise your credit score by taking out a personal loan? You can if you borrow responsibly – and a new study from shows that borrowers with lower credit scores can see significant benefits.

Outstanding personal loan balances have nearly tripled since 2011, rising from $46.4 billion to $125.4 billion by June 2018. While that’s a small slice of America’s $13.54 trillion total household debt, the effect on credit scores shouldn’t be ignored. LendingTree found that 62.4% of personal loan recipients had a higher score one month after receiving a loan – surprising since pre-loan credit checks from lenders should drop scores slightly.

The credit score increase in the first month may come from borrowers shifting high-interest balances to a more manageable personal loan and making an impact with their first payment. According to LendingTree, 61% of 2018 personal loans were used to consolidate debts and pay down high-interest credit card debt – actions that imply tackling a debt problem.

More creditworthy borrowers are likely getting a break on interest rates. The average annual percentage rate (APR) over all credit cards is at a record high of 17.64% according to, while ValuePenguin shows personal loan rates typically ranging between 5% and 36% – and LendingTree data shows significantly lower average rates for personal loans with credit scores of 660 and above. The average APR for personal loans to borrowers with excellent credit (720 and above) is 7.09%.

What about lower-credit-score borrowers? Average APRs can be staggering – up to 135.94% for those with credit scores below 560 – but their average loan amounts of $2,791 are well below the $17,997 average of the excellent credit group.

If you were approved for a loan with a low credit score, you must have something working in your favor to convince lenders you’ll make payments – and you’ll have a great positive impact just by following through with your first one.

Unfortunately, the effect fades over time for consumers in most credit score ranges. Borrowers with higher credit scores see the greatest drop over time.

Survey data shows that personal loan borrowers who started out with credit scores of 750 or above see a steady drop in their score, losing a single point on average in the first month and fourteen points after a year. Borrowers with credit scores from 700-749 fared even worse, fading from a two-point rise in the first month to a 25-point drop on average after a year.

The long-term trend is sunnier for lower-credit-score borrowers. Average credit score increases stay near twenty points for the first six months after receiving a personal loan and only fade to a ten-point increase at the twelve-month mark.

LendingTree data suggests that borrowers with higher credit scores have more to lose when taking out a personal loan, especially over the long term, while borrowers with lower credit scores can use personal loans to their advantage. If you are interested in a personal loan, visit our curated list of top lenders.

High-credit-score borrowers are likely acquiring greater debt than usual. They must keep credit scores from plunging by making all payments in full, paying ahead if it’s possible to do without penalty, and reducing other debts to keep credit usage relatively low. If you’re dealing with a low credit score, you can leverage your personal loan into a higher score by using the same tactics.

Says LendingTree Senior Research Analyst Kali McFadden, “Two of the biggest factors that go into a credit score are on-time payments and the revolving credit utilization rate. That refers to the amount of available credit that a person is using at any given time. For example, if you have a $10,000 credit limit and your credit card balance is $3,500, your utilization rate will be 35%. Any headway to knocking that utilization rate below 10 or 20% will increase one’s credit score. Yes, even if you take out an additional debt to cover the difference, generally speaking. So, it makes sense that anyone that the person who pays down that $3,500 to $1,000 using a $2,500 personal loan will see a spike in her credit score, because her utilization rate just dropped from 35% to 10%.

“Of course, she now has a monthly set bill to pay and missing a payment will drag her score down. Furthermore, if she runs up those cards again, she’ll lose that gain she made. So, if someone is taking out a personal loan to pay down credit cards, it’s really important that he or she lock those cards away and refrain from using them, except in emergencies.”

Make the most of your loan regardless of your starting credit score, and control spending in other areas to keep debt from creeping toward your collective credit limit. If you can, you’ll be rewarded with a higher credit score and better offers for any future credit needs.

You can check your credit score and read your credit report for free within minutes by joining MoneyTips.

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