Taking out a loan - or any type of credit - will affect your credit score and report. Understanding the risks will help you make an informed decision.

Which factors make up your credit score?

Your credit score helps your future lenders determine how responsible you were with credit in the past. It's made up of the factors on your credit report, such as the number of accounts you have, how much of your available credit you've used, your payment history, and the length of your credit history.

Through ClearScore, you can access your credit score and report for free. Simply sign up or log in to find out which factors influence your score.

How loans can help your credit score

How to use a loan to build your credit score: step-by-step

Knowing that a loan can improve your credit score is one thing - putting it into practice is another. Follow these steps to make sure every repayment counts towards a stronger profile.

• Check your credit report before applying (and fix errors). Before you take out any new credit, log in to ClearScore and review your report for inaccuracies - an incorrect default or duplicated account could be dragging your score down unnecessarily. Dispute errors with the relevant credit bureau so your starting position is as strong as possible.

• Borrow only what you can comfortably repay. It can be tempting to accept a higher loan amount, but over-borrowing increases your debt-to-income ratio and makes missed payments more likely. Use an affordability calculator to confirm the monthly instalment fits within your budget after essential expenses.

• Set up a debit order to avoid missed payments. Payment history is one of the most influential factors on your credit score. A debit order that runs shortly after payday removes the risk of forgetting a due date and ensures every instalment is recorded as on time.

• Keep existing credit utilisation below 30% while repaying. Taking out a loan does not mean you should max out your credit card. Keeping your overall utilisation low signals to lenders that you are managing all your accounts responsibly - not just the new one.

• Space out new credit applications by at least six months. Each application adds a hard enquiry to your report. Clustering multiple applications in a short period can suggest financial distress, so give your score time to recover between each one.

• Monitor your score monthly through ClearScore. Tracking your credit score each month lets you see the direct impact of your repayments and catch any unexpected changes early. It is free, and checking does not affect your score.

Does taking a loan increase your credit score? It certainly can - provided you treat each repayment as an opportunity to prove your reliability to future lenders. Consistency is the single biggest factor in turning a loan into a credit-building tool.

Taking out a loan can sometimes feel like an easy fix - especially if you have unexpected expenses. However, before you apply for a loan, you should make sure it's right for you. You can read our article on how to use a loan responsibly.

If you decide to go ahead, the good news is that it can have a positive impact on your credit score. A loan can help you:

1. Build a strong payment history

Having a record of paying back credit on time and in full helps build your credit history. Since a loan is usually paid back over several months, if you make regular, timely repayments, you'll be able to show future lenders that you can borrow responsibly.

2. Build a better credit mix

Having different types of credit can show lenders that you're able to manage a variety of different accounts. If you already have a credit card that you pay back on time every month, a loan could help create a better credit mix.

3. Reduce your credit utilisation ratio

Credit utilisation refers to the percentage of credit you use every month in relation to your overall credit limit. It's best to keep it below 30%, which means using less than 30% of your credit limit. If you regularly use more than this it may indicate that you're a risky person to lend to.

If you're struggling to keep up with your debt and your credit utilisation is too high, you may be able to take out a debt consolidation loan to pay it off. Once you do this, you'll only have to pay off a single debt, and depending on the quote you are offered it may carry a lower overall interest rate. Check the total cost of credit first: a longer repayment term can increase the total you repay, fees may apply, rates depend on the lender and your profile, and any facilities cleared by the consolidation can create further debt if you use them again.

If you pay it back responsibly and use less of your credit limit while you do, you could see a slow but steady rise in your credit score.

At ClearScore, you can compare debt consolidation loans matched to your credit profile. If you're struggling to pay your credit-bearing accounts, this is one option worth considering.

Can loans hurt your credit score?

Does paying off a loan early affect your credit score and report?

Paying off a loan early can affect your credit score and report - though the impact is not always what you might expect. In South Africa, settling a loan ahead of schedule is generally a positive financial move, but it can trigger a short-term dip in your score before the long-term benefits show through.

When you pay off a loan early, your lender reports the account as "settled" or "closed in good standing" to the credit bureaus (such as TransUnion, Experian, and XDS). This update typically appears on your credit report within one to two statement cycles. The account remains visible on your report for several years, serving as evidence that you met your obligations - which future lenders view favourably.

Does paying off your loan affect your credit score and report negatively? It can, briefly. Closing an active account reduces the number of open credit lines on your profile, which may lower your credit mix - one of the factors that make up your score. If the loan was your only instalment account, the effect can be more noticeable. This dip is usually small and tends to recover within a few months as the positive payment history continues to count in your favour.

Over the longer term, early settlement reduces your overall debt-to-income ratio, which strengthens your creditworthiness. A closed account marked as paid in full is one of the best signals a lender can see on your report. If you were carrying high monthly repayments, freeing up that cash flow also makes it easier to keep your remaining credit utilisation below 30%.

Before you settle a loan early, check your credit agreement for early repayment fees. Under Section 125 of the National Credit Act (NCA), you may settle a credit agreement early at any time, with or without advance notice. An early-settlement charge can apply only to large credit agreements (generally those exceeding R250 000, such as mortgages or substantial vehicle finance), and is subject to the conditions and statutory cap in section 125(2)(c) - it is not a flat penalty. Small and intermediate agreements cannot attract an early-settlement charge at all. Ask your lender for a settlement quote so you can weigh the fee against the interest you would save by paying the loan off sooner. In many cases, the saving still outweighs the penalty, but it is worth running the numbers first.

Do different types of loans affect your credit score and report differently?

Not all loans are treated the same on your credit report. The type of loan you take out determines how it appears to credit bureaus, how it influences your credit mix, and where the biggest risks to your score lie. Understanding these differences helps you choose the right product - whether you are consolidating debt or financing a vehicle.

Cash loans, in particular, can affect your credit differently from longer-term products. Because they carry higher interest rates and shorter repayment windows, even a single missed payment has a proportionally larger impact on your score. If you are considering any of these loan types, log in to your ClearScore offers to compare options matched to your credit profile - checking your offers will not affect your score.

As with any type of credit, it's important to understand the risks. Taking out a loan can do the following:

1. It adds a credit enquiry to your credit report

A credit enquiry happens when you apply for a loan and it will be shown on your credit report. It can make a dent in your credit score, which should be short-term as long as you pay it back in line with your credit agreement.

However, if you're also looking for other types of credit, you may find it's harder to get accepted. That's because it can look like you're desperate for credit and risky to lend to. A good rule of thumb is to wait about six months between opening credit accounts, but it depends on your circumstances.

2. It's a form of debt

Bear in mind that all credit is a type of debt. Borrowing money via a loan, credit card, or even a phone contract means you're in debt for the amount you take out. If you're taking out a loan, it's important to be sure you can afford to make the repayments.

3. It can impact your payment history

A loan comes with interest fees so it's important to manage the repayments responsibly so that you can avoid paying extra money.

If you miss a payment, your credit score can be negatively impacted. This will fade over time but a large drop in your credit score can impact the offers you're seeing and your chances of being accepted for new credit.

It's important to check up on your credit score regularly so that you're aware of any changes that may be happening. You can access it through ClearScore 24/7 and for free.

What credit score do you need to get a loan?

There isn't a specific score that you need to get a loan. However, there are factors that impact your chances. Generally, the better your score, the better the offers you have available to you.

On ClearScore, you can access different kinds of loans, depending on your specific needs. Each of these is also tailored to different credit scores, which means that there's something for everyone.

If you log in, you will be able to see which loans match your credit profile. Remember, you can view your credit offers as often as you'd like. It won't impact your credit score at all.

Does a personal loan show up on a credit report?

Yes, a personal loan will show on your credit report. This is because your report is designed to accurately represent the credit accounts you have. It shouldn't be a problem if the information is correct and you diligently make the repayments. Any missed or late payments will also show on your credit report.

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

FAQ: Loans and your credit score

A personal loan may cause a small, temporary dip in your score when you first apply - this is due to the hard enquiry the lender places on your credit report. However, if you make every repayment on time and in full, the loan is far more likely to strengthen your score over the medium to long term by building a solid payment history.

A score of 620 falls within the "On good ground" band (616-633) on the ClearScore Experian scale, which means you're generally seen as a reasonable borrower. Many lenders will consider your application, and you may qualify for competitive interest rates, though the best rates are usually reserved for higher score bands. Log in to your ClearScore offers to see which loans are matched to your profile - it will not affect your score.

Missed or late payments are consistently the most damaging factor. Even a single payment recorded as 30 days overdue can cause a significant drop. Other major negatives include defaults, judgments, and high credit utilisation (using more than 30% of your available credit limit).

A hard enquiry from a loan application may remain on your South African credit report for up to one year. Its impact on your score diminishes over time, with most of the effect fading within the first six to twelve months.

No. Viewing your credit score and browsing offers on ClearScore is classed as a soft enquiry, which is not visible to other lenders and has zero impact on your score. You can check as often as you like.

If you have an unexpected expense, you may be wondering whether it's better to take out a loan or put it on your credit card. There are some differences to be aware of:

A credit card is a revolving credit account

• This means the credit - or the money you borrow - can be rolled on to the next month, with interest. Rolling over your payments can increase your chances of falling into a pattern of debt.

• You can use 100% of your credit limit, but it will affect your credit utilisation, which has a knock-on impact on your score and report. On the other hand, your credit score won't grow if you don't take out credit either. Therefore, try to keep your credit utilisation around 30%.

• Your credit card might come with rewards when you spend - you should check if the benefits outweigh the potential risks.

A loan uses instalments

• Unlike a credit card, you can't carry a payment over to the next month - the monthly payments (instalments) are fixed. It can make it easier to budget because you'll know what you owe in advance, but not making the instalments counts as a missed or late payment on your report.

• Loans can come with lower interest rates and higher amounts than credit cards. You should make sure you can comfortably afford the repayments.

• They may have additional fees, such as early repayment charges, and you should factor these in when thinking about your loan period.

You should get to grips with the charges and fees a credit card or loan comes with before using them for a large purchase. The option you choose will depend on your own needs and circumstances. Before you get started, you can read our article on whether you should get a credit card or a loan.

On ClearScore (a credit broker, not a lender), we will match you with both credit cards and loans. You can view your offers anytime you want, and you can observe how your credit impacts your credit score.