Personal Loans hurt your credit? Truth or Myth?

[Dervrak]

I've read some conflicting information on what personal loans do to your credit score. Many of the money mangement sites I've read say to avoid them at all costs because they hurt your score even after being paid. I've read others that say just the opposite, that as long as you they are "paid as agreed", they are no different than any other loan or credit account and can even help diversify your credit portfolio. Then I've also read that there used to be some truth that they could slightly hurt your credit but that was under older scoring systems that are no longer used. I've also read that although they no longer impact your credit score directly, certain credit card companies look at them negatively for their own internal scoring systems.

So what is the truth of the matter? I ask because from 2011-2015 when my credit history was a little thin and the only credit card I had were low CL of $1,000 or less. I took out 5 personal loans for various large purchases. (4 from One Main Financial, 1 from Lightstream). The One Main Financial Loans ranged from $4,000 to $12,000 and Lightstream was $30,000 (which I used to purchase a car because ironically the rate was way lower than I could get on a standard auto loan at the time, 9% as opposed to 13.9%, which was darn weird in my opinion as the auto loans were secured and the Lightstream wasn't).  All of the One Main loans have long since been paid off and the Lightstream loan is down below $5,000 and should be paid off in the next 6 months. Now I had a perfect payment history on all of these.

My credit history has grown considerable since 2015 and I have a respectable credit score of 763 and credit card companies throwing cards with $10,000 limts at me like candy. So if those paid personal loans sitting on my file are hurting my credit, they don't seem to be very much. But I can't shake the feeling that maybe I unknowingly shot myself in the foot for the next ten years by getting those loans in the first place and at some point my credit score will stop going up because they are on my file.    

[IPIF]

My guess is that the loans from One Main Financial are coded as consumer finance accounts (CFA) and will reduce your FICO score by a small amount until they drop off from credit report probably at 7 years after they were paid off. Although I have read that the CRAs are not required to drop a tradeline in good standing at 7 years.

It isn't about whether it is a personal loan, but rather whether it is coded as a CFA.

Any lender with the word Financial in its name can be problematic.

Even some major banks have consumer finance subsidiaries with the word Financial in their name which can be problematic.

[LakeLife]

I've had three Lending Club loans in the past 6 years that are all paid off, and if they have hurt my FICO scores at all it's been very little.  The only time I see them mentioned is on a site that scores via VantageScore, and we all know what people think of VantageScores on here. 

The reason I had so many in a short time frame, is that I used the first one to pay down CC debt which in turn increased my FICO scores and allowed me another LC loan at a lower interest rate while paying down more CC debt along with the previous LC loan.  Rinse and repeat, and my last LC loan was under 7% due to my credit steadily improving.  I paid off the loan in a couple of years.  In most situations, I would not hesitate to suggest a CFA loan unless the root of the debt problem hasn't been addressed, and there's a chance that the person will still max out CCs along with the loan.

Funny enough, my VantageScores do run sub-800 and at last check are around 796.

[Brian_Earl_Spilner]

Once your score  crosses 750 you're already getting the best rates so it's not affecting you in that way.

[sarge12]

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@Dervrak wrote:

I've read some conflicting information on what personal loans do to your credit score. Many of the money mangement sites I've read say to avoid them at all costs because they hurt your score even after being paid. I've read others that say just the opposite, that as long as you they are "paid as agreed", they are no different than any other loan or credit account and can even help diversify your credit portfolio. Then I've also read that there used to be some truth that they could slightly hurt your credit but that was under older scoring systems that are no longer used. I've also read that although they no longer impact your credit score directly, certain credit card companies look at them negatively for their own internal scoring systems.

So what is the truth of the matter? I ask because from 2011-2015 when my credit history was a little thin and the only credit card I had were low CL of $1,000 or less. I took out 5 personal loans for various large purchases. (4 from One Main Financial, 1 from Lightstream). The One Main Financial Loans ranged from $4,000 to $12,000 and Lightstream was $30,000 (which I used to purchase a car because ironically the rate was way lower than I could get on a standard auto loan at the time, 9% as opposed to 13.9%, which was darn weird in my opinion as the auto loans were secured and the Lightstream wasn't).  All of the One Main loans have long since been paid off and the Lightstream loan is down below $5,000 and should be paid off in the next 6 months. Now I had a perfect payment history on all of these.

My credit history has grown considerable since 2015 and I have a respectable credit score of 763 and credit card companies throwing cards with $10,000 limts at me like candy. So if those paid personal loans sitting on my file are hurting my credit, they don't seem to be very much. But I can't shake the feeling that maybe I unknowingly shot myself in the foot for the next ten years by getting those loans in the first place and at some point my credit score will stop going up because they are on my file.    

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Whether a personal loan hurts or helps your score depends on many factors. If it comes via a consumer finance company, it hurts. If is your 5th personal loan and all are close to the original balance, it hurts. If it is from a bank or credit union, and is your only installment loan it most definitely helps, but will help more once the loan is significantly payed down. You do in fact need at least one installment loan in your portfolio because credit mix is 10% of the credit score. Anyone saying personal loans always hurts your credit score, does not know what they are talking about, but it does matter where the loan comes from, and how much of the original balance has been paid as agreed. If you are making car payments, that is an installment loan so no further installment loans are needed. Mortgage payments are also installment loans. It is generally accepted that you need 1 installment account that has been paid down significantly, and 3 revolving accounts that has 1 card reporting a balance, and the other 2 reporting 0 balance. None of the cards needs to carry a balance beyond the due date, and the balance you let report needs to be less than 29% on that 1 card and the balance needs to be under 8.9% of combined credit limits. This is refered to as AZEO here, but could also have 2 cards report if you have 5 cards total, because it actually matters that less than half of the cards report a balance, but 1 card at least needs to report a balance. 3 cards is the minimum number of cards that can alloe you to do that. If you have only 1 or 2 cards, even 1 card reporting a balance will be 50% or 100%, which does not meet the under half the cards reporting a balance, so for best utilization you must have at least 3 cards.

[sarge12]

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@IPIF wrote:

My guess is that the loans from One Main Financial are coded as consumer finance accounts (CFA) and will reduce your FICO score by a small amount until they drop off from credit report probably at 7 years after they were paid off. Although I have read that the CRAs are not required to drop a tradeline in good standing at 7 years.

It isn't about whether it is a personal loan, but rather whether it is coded as a CFA.

Any lender with the word Financial in its name can be problematic.

Even some major banks have consumer finance subsidiaries with the word Financial in their name which can be problematic.

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The CFA being on a report will not damage a fico 08 score, but will cause a hit to other score models that are currently used for mortgages. For fico 08, and fico 09, a CFA is considered the same as any other installment loan. Only the earlier versions differentiate CFA loans from Bank loans. If seeking a mortgage in the future CFA loans should be avoided, and even some loans obtained from auto manufaturers is considered a CFA, I know Honda financial is a CFA...learned that the hard way.   PS::: CFA accounts hurt the earlier score model even after being paid off, with perfect payment history until it drops off the credit report...the mere existance of a CFA account is considered a negative on these models.

[IPIF]

A mortgage may technically be an installment loan, but I believe that FICO 8 scores mortgages differently from non-mortgage installment loans.

[sarge12]

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@IPIF wrote:

A mortgage may technically be an installment loan, but I believe that FICO 8 scores mortgages differently from non-mortgage installment loans.

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That may be true, so you might need another installment loan.

[Anonymous]

The posters in this thread hit the nail on the head. Speaking for my experience, I used a Wells Fargo Financial Visa Credit Card with 27% Apr. It coded to the bureaus as a CFA since I signed a loan type agreement at a loan office (all new to me). Never heard of CFA Coding until some body flagged my credit report for having such a loan. Again, I had no idea about any of this?!

Years later the effect of the CFA Coding faded and is not reflecting in my Fico Scores. The loan/credit card is still on my credit reports (no effect). Of note, this happened many years back and it did cause different results depending on the scoring models used!

[CH-7-Mission-Accomplished]

This does not pertain to an installment loaned coded as a personal finance loan, but I did get a ding years ago when I bought a Dell computer for my home-based business and opted to take their financing.   They used my social security number to approve the loan (6K) and reported on my credit reports.   It turns out that a Dell Financial credit card (which was actually issued by WebBank) was coded as a consumer finance loan.   After my BK7 I disputed that credit card and it just vanished.   It was a good lesson for me.

In the old days (when I was young) companies (like the gas company) would come out and offer you a new furnace/water heater, etc., and would let you pay it off over time.   These were generally funded by consumer finance companies  like American General or Household Finance.   They covered things like new windows and that sort of thing