Do Unpaid Personal Loans Affect Credit?

Credit score is one of those things that becomes nearly invisible when it is good but becomes a huge source of stress when it’s not. You have to think about it as an adult because having a poor score can impact many important decisions in your life. And, the things you do and decisions you make with money, can in turn affect your credit score. One of the worst things you can do for credit is not to get loans and have debt, but to use personal loans irresponsibly. Here are some tips for borrowing responsibly and actually building your credit score.

Never Borrow More with Personal Loans Than You Need

Before you ever apply for personal loans or any other type of loan, take the time to figure out exactly how much you need. Over-borrowing is a common but big mistake people make with loans. If you take out more than you need, you end up with more interest payments and a bigger burden when it comes to repayment. Choose a loan amount based on your actual needs and resist the urge to go over that limit.

Always Pay Personal Loans on Time, or See Your Credit Take a Hit

The answer to the original question is that, yes, not paying back your personal loans will hurt your credit score. The lenders you owe can and will report your late payments or lack of payment to the major credit reporting agencies, and that will directly impact your score. To avoid this happening, take all steps needed to pay loans back on time, every time.

This starts with only borrowing what you need, but there is more to it than that. Make sure you understand the payment terms before you sign for a loan. Know when payments are due and how much is due. Select an automatic repayment plan if it’s available. This will ensure that your payments are deducted right from your account so you can’t forget due dates. If this is not an option on your personal loans, set alarms on your devices so that you remember a few days ahead of time and can be sure you have the money ready for the payment.

Build a Better Score with Personal Loans

Although using personal loans in an irresponsible way, like paying late or borrowing too much, can hurt your credit score, doing it the right way can actually build up your score. Avoid carrying too much debt at once, or having too many credit cards, but use occasional personal loans and watch your score increase. When you demonstrate that you use debt, but you use it responsibly, you prove that you deserve to have a better score, and you’ll see it change. Borrow a reasonable amount, make repayments on time, every time, and avoid having more than one loan at a time and you can improve your credit.