Do Personal Loans Build Credit? Here’s What Actually Helps (And What Hurts)
Trying to build your credit from scratch feels like a catch-22. You need credit to qualify for things—but to get credit, you need a good score. 😵💫
So you start Googling…
“Do personal loans build credit?” “Will taking out a personal loan help my score?”
And the internet throws a bunch of mixed answers at you. Here's the truth: personal loans can help your credit—but only if you play it smart.
You might also be wondering how do credit scores work—since understanding that is key to seeing how loans fit in.
Let’s break down how it works, what to watch out for, and whether a personal loan is actually the right move for your credit journey.
What Is a Personal Loan—and Why Do People Use Them?
A personal loan is a lump sum of money you borrow from a bank, credit union, or online lender—and pay back in monthly installments over time. People usually take them out for things like covering a big expense, consolidating credit card debt, or smoothing out cash flow.
There are two kinds:
Secured personal loans are backed by something you own (like your car or savings).
Unsecured personal loans don’t require collateral, but typically come with higher interest rates.
Most lenders report your payment activity to credit bureaus, which means a personal loan can help—or hurt—your credit score, depending on how you manage it.
How Can a Personal Loan Build Credit?
Used the right way, a personal loan can help you build credit in three key ways:
Payment history: Making monthly payments on time shows you’re reliable—this is the most important part of your credit score.
Credit mix: If you’ve only ever had a credit card, a loan adds variety to your profile, which credit scoring models like.
Revolving debt relief: If you use a personal loan to pay off credit cards, your credit utilization drops—and that helps your score too.
So yes—a personal loan can build credit. Just remember: the loan itself doesn’t help. How you handle it does.
What Can Hurt Your Credit (Even If You Had Good Intentions)
Not all personal loans are helpful. Here’s where things can go sideways:
Missing a payment (even one) can tank your score
Borrowing too much can throw off your debt-to-income ratio
Applying for multiple loans in a short period triggers hard inquiries, which can temporarily lower your score
Let’s say you borrow $1,000 at 10% APR over 12 months. You make every payment on time. That’s 12 months of positive history, zero missed payments, and proof you can manage a loan. ✅
Now flip it—say you miss two payments and default. That same loan just became a red flag.
Does Paying Off a Personal Loan Help Your Score?
Absolutely. Paying off a personal loan, especially on time or early, leaves a positive mark on your report.
Positive repayment history can stay on your report for up to 10 years
Late or missed payments stick around for 7 years
A fully paid loan shows lenders you followed through—which makes them more likely to trust you in the future
💡 Just make sure the lender doesn’t charge a prepayment penalty before you pay off early.
Should You Take Out a Personal Loan Just to Build Credit?
If you actually need the money—maybe. If you don’t? Probably not. When you’re just starting to build credit, borrowing money you don’t need is risky. You might not get the best interest rate, and even small mistakes can cost you.
Smarter options for beginners:
A secured credit card: You add a deposit, use the card, and build credit with every purchase.
A credit building app: Like Step, which reports your responsible use without traditional borrowing.
Becoming an authorized user on a trusted person’s credit card—if they pay on time.
Quick Answers: Personal Loans & Your Credit
Can a personal loan build credit? Yes—if you make your payments on time.
Can it hurt your credit? Also yes—if you miss payments or borrow too much.
How long does a personal loan stay on your credit report? Up to 10 years if paid on time. 7 years if there’s negative activity.
Best use case? When you need to borrow anyway and want to build credit at the same time.
Final Thoughts — Don’t Borrow to Boost Your Score Unless It Makes Sense
So… do personal loans build credit? Yes—but they’re not magic. They’re just one tool.
If you’re already borrowing for a real reason, and you’re confident you can repay on time, a personal loan can definitely help. But if you’re only doing it to boost your score, there are safer, lower-stakes ways to get started.
Try a secured credit card, download a credit-building app, or take small, consistent steps that grow your credit over time.
A good score doesn’t happen overnight. But with the right tools—and zero missed payments—you’ll get there. 🙌
