Taking out a loan, or any type of credit, will affect your credit score and report. Understanding how it works will give you a clearer picture of what could be right for your situation.

What factors go into your credit score?

Your credit score (which varies by credit reference agency; for example, Equifax uses a score out of 1,000, which ClearScore, not itself a credit reference agency, provides for free using Equifax data) combined with your credit report helps lenders understand how you manage money.

It is made up of information in your credit report, such as the number and type of accounts you have, how much of your available credit you have used, your payment history, and the length of your credit history.

How loans can help your credit score

Taking out a loan can feel like a straightforward solution when unexpected expenses arise. Before you apply, it is worth making sure a loan is the right option for your circumstances.

If you do decide to go ahead, there are some potential positive effects on your credit score. A loan may help you:

• Build a strong payment history Having a track record of repaying credit on time and in full helps build your credit history. Because a loan is typically repaid over several months, making regular, timely repayments may demonstrate to future lenders that you can borrow responsibly.

• Build a better credit mix Having different types of credit can show lenders that you are able to manage a variety of accounts. If you already have a credit card that you pay off on time each month, adding a loan could help create a more varied credit mix.

• Reduce your credit utilisation ratio Credit utilisation is the proportion of your available credit that you use each month. If you have a credit card, it is generally advisable to keep your utilisation below 30%, meaning you use less than 30% of your credit limit. Consistently using more than that may suggest to lenders that you are a higher-risk borrower. If you carry credit card debt, you could consider a personal loan or debt consolidation loan to pay it off. Your repayments would then be made in fixed instalments, which do not count towards your credit utilisation. Paying the loan back on time, while keeping your credit card usage low, may help improve your credit score over time. Results will depend on your individual circumstances and overall credit management.

Learn more: What is a credit limit and how does it affect your credit score and report?

How loans may hurt your credit score

As with any type of credit, it is important to understand the risks. Taking out a loan:

• Adds a hard search to your credit report A hard search is recorded on your credit report when you formally apply for a loan. It may temporarily lower your credit score, though the size of the impact varies depending on your overall credit profile and payment history. If you are also looking to take out other forms of credit around the same time, such as a credit card or car finance, multiple hard searches in a short period could make it harder to be accepted. This is because lenders may view a high number of recent applications as a sign that you are relying heavily on credit. As a general guide, it is worth spacing out credit applications by around six months, though this will depend on your own circumstances.

• Is a form of debt It is worth keeping in mind that all credit is a form of debt. Borrowing money through a loan, credit card, or even a phone contract means you owe the amount you have taken out. If you are considering a loan, make sure you are confident you can afford the repayments before you apply.

• Can affect your payment history Loans come with interest, so keeping on top of repayments matters both financially and for your credit score. If you miss a payment, your credit score may be negatively affected. The extent of the impact varies by credit reference agency and depends on your wider credit history. The effect will fade over time, but a significant drop in your score could affect the types of offers available to you and your chances of being accepted for new credit.

How long does a loan affect your credit score and report?

A loan can affect your credit score and report at every stage - from the moment you apply through to years after you have paid it off. The duration and nature of that impact depends on whether the effect is positive or negative, and how consistently you manage your repayments.

The initial dip after application

When you formally apply for a loan, a hard search is recorded on your credit report. This may cause a small, temporary dip in your credit score. The hard search typically has the most influence on your score during the first 12 months, though it remains visible on your credit report for up to six years. In most cases, the effect on your score diminishes well before the record disappears entirely. If you are wondering how long a new loan affects your credit score, this initial period is usually the most noticeable.

The repayment period

Throughout the life of your loan, your lender reports your payment activity to credit reference agencies each month. Every on-time payment contributes positively to your credit history, gradually building a track record of responsible borrowing. Conversely, any missed or late payments are also recorded monthly and can drag your score down for as long as the loan is active. This ongoing reporting means that taking out a loan does not simply lower your credit score once - it continuously shapes it, for better or worse, depending on how you manage the account.

After the loan is paid off

Once your loan is fully repaid, the account is marked as closed on your credit report, but it does not disappear straight away. A settled loan with a clean repayment record typically remains on your report for up to six years from the date it was closed. During that time, the positive payment history can continue to support your overall creditworthiness. This is one reason why a well-managed loan may benefit your credit profile long after the final payment has been made.

How long missed payments stay on your credit report

If you miss a payment during the loan term, that record stays on your credit report for six years from the date of the missed payment. The impact on your score is usually strongest in the months immediately following the event and fades gradually over time. However, while the missed payment remains visible, it could still influence a lender's decision when you apply for new credit. Keeping up with repayments from the outset is the most reliable way to ensure a loan works in your favour over the long term.

Does applying for a loan affect your credit score and report?

Yes - but the extent depends on the type of search carried out. Understanding the difference between a soft search and a hard search can help you explore your options without unnecessary impact on your score.

Soft search vs hard search - what happens at each stage

When you first check your eligibility for a loan, lenders typically carry out a soft search. This is a preliminary look at your credit profile that does not appear on the version of your report seen by other lenders and has no effect on your credit score. A hard search, on the other hand, is recorded when you formally submit a loan application. It is visible to other lenders and may temporarily lower your score. The distinction matters: browsing and comparing offers is generally risk-free, while each formal application leaves a mark.

Does checking your eligibility affect your score?

No. Eligibility checks use a soft search, which means they do not affect your credit score and report. Services such as ClearScore allow you to see which loans you are likely to be accepted for before you apply, using only a soft search that is visible to you alone. This means you can compare interest rates, terms, and monthly repayments without worrying about the impact on your credit report. It is a sensible first step before committing to a formal application.

Can multiple loan applications hurt your score?

Submitting several formal loan applications in a short space of time can have a more noticeable effect on your credit score. Each application triggers a separate hard search, and lenders may interpret a cluster of recent searches as a sign that you are struggling financially or taking on more credit than you can manage. As a general guide, it is worth spacing out formal applications by around six months where possible. If you are comparing options, use eligibility checkers first to narrow down your shortlist, so that when you do apply, you are applying for a loan you are more likely to be accepted for.

Can taking out a loan help build your credit?

Yes, taking out a loan and repaying it responsibly can help build your credit over time. However, whether it is the right approach depends on your starting point, your financial circumstances, and the cost of borrowing.

Using a loan to establish a credit history

If you have a limited credit history - sometimes called a "thin file" - lenders have little information to assess your creditworthiness. This can make it harder to be accepted for competitive rates on credit cards, mortgages, or other products. A small personal loan, repaid on time each month, adds regular payment data to your credit report and begins to build the track record that lenders look for. Over several months, this consistent activity can improve how you appear to future lenders.

Credit-builder loans - what they are and how they work in the UK

A credit-builder loan is specifically designed for people looking to establish or improve their credit history. Unlike a standard loan, the money you borrow is typically held in a savings account by the lender while you make fixed monthly repayments. Once you have repaid the full amount, the funds are released to you. Each repayment is reported to credit reference agencies, so the loan gradually builds a positive payment history. Credit-builder loans are usually offered for relatively small amounts and short terms, making them a lower-risk way to demonstrate responsible borrowing.

Is it worth taking out a loan just to build credit?

It is important to weigh the cost carefully. Any loan comes with interest, so you will pay more than you borrow. If building credit is your primary goal, consider whether the total cost of interest justifies the benefit. For someone with no credit history at all, a credit-builder loan with modest interest charges may be worthwhile. For others, there may be more cost-effective routes to the same outcome.

Alternatives to loans for building credit

A loan is not the only way to build your credit score. Other options include:

• Credit cards for low credit scores - using a credit card for small, regular purchases and paying the balance in full each month can build a positive payment history without paying interest.

• Using a credit-builder credit card - a credit-builder card is designed for people with limited or lower credit histories (such as those in the Let's start climbing (0-409) or Moving on up (410-519) bands). Using it for small, regular purchases and paying the balance in full each month builds a positive payment history reported to Experian, Equifax, and TransUnion.

• Registering on the electoral roll - being on the electoral register at your current address helps lenders verify your identity and can positively influence your credit score.

• Paying bills on time - some credit reference agencies now factor in regular payments such as council tax and utility bills, so consistent bill payments can support your score.

What credit score do you need to get a loan?

There is no single minimum score required. Lenders assess your overall creditworthiness - including your income, existing borrowing, and whether repayments are affordable - and approval is never guaranteed. All applications are subject to credit checks and affordability assessments. Generally speaking, a stronger credit score - such as Looking bright (605-724) or Soaring high (725+) on Equifax's scale - may mean you are shown more competitive offers, though the outcome will vary by lender.

Does a personal loan show up on a credit report?

Yes. A personal loan will appear on your credit report, because your report is designed to give an accurate picture of the credit accounts you hold. This should not be a problem as long as the information is correct and you keep up with your repayments. If something on your report looks wrong, you can raise a dispute with the relevant credit reference agency.

Any missed or late payments will also be recorded on your credit report.

Consolidating your debt

If you have built up debt across several loans or credit cards, a debt consolidation loan is worth considering.

Debt consolidation means combining your existing debts from multiple accounts into a single loan. You use the loan to pay off those accounts, leaving you with just one monthly repayment to manage. This can make budgeting simpler, although it is important to check that the total cost of the new loan, including interest and any fees, does not end up higher than what you currently owe overall.

Try our debt consolidation calculator to see what that could look like.

Is it better to have a personal loan or credit card debt?

Facing an unexpected expense can make it difficult to know whether to take out a loan or use a credit card. There are some key differences to be aware of:

A credit card is a revolving credit account

• This means the balance you do not pay off can roll over to the next month, with interest added. Carrying a balance regularly can increase the risk of falling into a cycle of debt.

• You can spend up to your credit limit, but doing so will push up your credit utilisation ratio, which can affect your credit score and report.

• Some credit cards offer rewards when you spend. It is worth checking whether those benefits outweigh the potential costs, particularly if you carry a balance.

A loan uses fixed instalments

• Unlike a credit card, you cannot defer a loan payment to the following month. Your monthly repayments are fixed, which can make budgeting more straightforward since you will know what you owe in advance. Missing an instalment will, however, be recorded as a late or missed payment on your credit report.

• Loans can sometimes offer lower interest rates and higher borrowing amounts than credit cards. You should make sure you can comfortably afford the repayments before applying.

• Loans can come with additional fees, such as Early Repayment Charges (ERCs). It is important to factor these in when choosing your loan term.

Before using either product for a large purchase, take the time to understand all associated charges and fees. The right option will depend on your personal needs and financial situation. Comparing your options before you apply is a sensible place to start.

Start comparing loans with ClearScore today. ClearScore acts as a credit broker, not a lender, to help you find and compare loan options from a range of lenders. All loans are subject to status and affordability checks.

Understanding what appears on your credit report empowers you to take control of your financial future. Checking your credit report regularly, disputing any errors promptly, and making informed borrowing decisions may help improve your creditworthiness over time, though outcomes depend on your individual circumstances and how consistently you maintain positive financial habits.

Ready to see what is on your credit report? Check your free credit score and report with ClearScore - checking will not affect your score, as it uses a soft search visible only to you. It takes just a few minutes and could be a useful first step towards better financial wellbeing.

Compare loans with ClearScore: find a loan that suits your circumstances

Frequently asked questions about loans and credit scores

Does a bank loan affect your credit score and report differently to a personal loan?

Not in any meaningful way. Whether you borrow from a high-street bank, a building society, or an online lender, the loan is recorded on your credit report in the same way. Credit reference agencies track the account type, balance, repayment history, and whether payments are made on time - regardless of the provider. What matters most is how you manage the loan, not where it comes from.

Is taking out a loan bad for your credit?

Not necessarily. A loan may cause a small, temporary dip in your credit score due to the hard search at application, but making repayments on time and in full can strengthen your credit profile over the longer term. A loan becomes harmful to your credit only if you miss payments, default, or take on more debt than you can comfortably afford. Borrowing responsibly and within your means is the key factor.

Does having a loan affect your credit score and report even after it is paid off?

Yes. A closed loan remains on your credit report for up to six years after it is settled. If you maintained a clean repayment record, this history continues to work in your favour during that period, showing future lenders that you can manage credit responsibly. If there were missed payments, those will also remain visible for six years from the date they occurred.

Do personal loans show up on your credit report?

Yes. All regulated personal loans appear on your credit report. This includes the outstanding balance, monthly repayment status, and any missed or late payments. The record is designed to give an accurate picture of the credit you hold, and it remains on your report for up to six years after the account is closed.

How many points does your credit score drop when you apply for a loan?

There is no fixed number of points that your score will drop. The impact of a hard search varies depending on your overall credit profile, how many other recent applications you have made, and the scoring model used by the credit reference agency. For most people with a reasonable credit history, the dip is relatively small and temporary. Checking your eligibility through a soft search first - which does not affect your score - is a practical way to compare options before committing to a formal application.

With ClearScore, you can compare loan offers and check your eligibility without affecting your credit score. Eligibility checks use a soft search, which is only visible to you. When you are ready to formally apply, the lender will carry out a hard search, which may affect your score. Here is how it works:

1. Check your eligibility first. See which loans you are likely to be accepted for before you apply. ClearScore uses a soft search, visible only to you, that will not affect your score, so you can explore your options with confidence.

2. Compare real, personalised offers. You will see actual loan offers based on your credit profile, with transparent terms. You can compare interest rates, monthly repayments, and total costs side by side to find the option that suits you best.

3. Apply when you are ready. Once you have found a loan you would like to proceed with, you can apply directly through ClearScore. Acceptance is not guaranteed and depends on the lender's criteria. Your credit score and report are available to view throughout, so you can stay on top of your financial position.

Why use ClearScore to compare loans?

• Free to use. There is no cost to you for using the comparison service. ClearScore may receive a commission from lenders if you take out a product.

• Access to a wide range of lenders. Compare options from up to 45 loan providers in one place.

• Soft credit checks. Check your eligibility without it showing on your credit report or affecting your score.

• Personalised matching. See offers based on your credit profile rather than generic advertised rates.

• Track your progress. Monitor your credit score and report weekly to see how your position changes over time.

Whether you are consolidating existing debt, funding a significant purchase, or planning ahead, ClearScore can help you compare loans that reflect your credit profile and financial goals. The right loan for you will depend on your individual circumstances.

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