Building credit is crucial if you want to qualify for a mortgage, auto loan or credit card at favorable terms. In early 2025, the national average FICO® Score stood at 715 , a modest decline from the previous year that FICO analysts attribute to rising credit-card use and an uptick in missed payments as student-loan delinquency reporting resumed. If your score is below that benchmark, you might wonder whether taking out a personal loan could help you build credit. The answer depends on how you use the loan and whether it fits into your broader financial plan.

How Personal Loans Influence Your Credit Score

A personal loan is an installment loan that you repay over a fixed period. When managed responsibly, it can improve your credit because:

• Payment history carries the most weight. Payment history accounts for roughly 35 percent of your FICO® Score . Each on-time payment you make is reported to the credit bureaus, helping build a positive track record when you pay consistently . Missing payments can severely damage your credit, so setting up automatic transfers or reminders is essential because payment history makes up 35% of your score .
• A diverse credit mix helps. Credit-scoring models reward borrowers who successfully manage different types of credit. Personal loans can diversify your credit mix by adding installment debt alongside revolving accounts like credit cards (credit mix factor) . Lenders view this variety as evidence that you can handle multiple obligations.
• Lowering credit utilization can boost scores. Using a personal loan to pay down high-interest credit cards can reduce your credit-utilization ratio—another important factor in your score. By converting revolving debt into a fixed-payment loan, you free up available credit and may see gradual improvement (utilization impact) .
• Credit-builder loans offer a structured path. Some lenders offer credit-builder loans where funds are held in an account until you’ve made all the payments. These products involve small loan amounts and can help consumers with limited credit history establish a positive payment record over time .

It’s important to note that simply taking out a loan won’t raise your score. Personal loans can also hurt your credit if you’re not careful: the application triggers a hard inquiry, increases your total debt and reduces the average age of your accounts. Failure to repay on time will undermine any potential benefits (missed payments can harm your credit health) .

Advantages of Using a Personal Loan to Build Credit

1. Predictable repayment schedule. Personal loans have fixed monthly payments, which makes budgeting easier. Knowing exactly how much you owe each month helps you avoid late fees and build a strong payment history.
2. Improved borrowing potential. As you repay your loan and reduce your overall debt, your credit profile may improve. A higher score can unlock better rates on future loans and credit cards.
3. Reduced credit utilization. Paying off revolving debt with a personal loan can lower your credit-utilization ratio, a key metric in credit-scoring formulas.
4. Enhanced credit mix. Adding an installment loan alongside existing credit cards shows lenders you can manage multiple types of credit simultaneously.
5. Access to credit-builder products. Specialized credit-builder loans let you borrow a small amount that is placed in a savings account until you’ve made all payments, helping to establish credit without taking on large debt.

Risks and Challenges

Personal loans aren’t always the right tool. Weigh these potential drawbacks before you apply:

• High interest rates for low credit scores. Borrowers with poor credit often face steep annual percentage rates. NerdWallet’s data shows that pre-qualified borrowers with credit scores below 630 received an average rate of about 21.65% , and many consumers with very low scores cannot qualify for a rate below 36% , which many consumer advocates consider the upper limit for an affordable loan. High rates increase the cost of borrowing and the likelihood of default.
• Short repayment periods. Short-term personal loans are typically repaid in 12 months or less.
• Potential debt spiral. A personal loan increases your total debt burden. Late or missed payments can hurt your credit score and trigger additional fees. Payday loans, in particular, have higher fees and less-competitive APRs than traditional personal loans and can lead to continuous reborrowing if you can’t repay on time.
• Temporary credit score dip. Applying for a new loan triggers a hard inquiry, which may temporarily lower your credit score. Additional fees—such as origination or processing fees—also add to the cost.

Tips for Successfully Building Credit with a Personal Loan

1. Borrow only what you can repay. Compare offers and avoid high-APR loans. Borrowing more than you can comfortably repay will hurt your credit and finances.
2. Always pay on time. Payment history is the biggest factor in your FICO score. Set up automatic payments or reminders so you never miss a due date (payment reminders/automation) .
3. Use credit-builder products wisely. If you have a limited credit history, consider a credit-builder loan or secured card to establish on-time payments.
4. Monitor your credit regularly. FICO reports that 71% of consumers check their credit scores multiple times a year , with nearly half of Gen Z and Millennials checking monthly. Staying informed helps you track progress and catch errors.
5. Maintain a balanced credit mix. Keep older accounts open when possible, limit new credit applications and focus on managing existing debts. Having a mix of installment and revolving accounts—managed responsibly—can aid your score.

Make Your Plan for 2026

A personal loan can be a useful tool for building credit—especially when you choose the right loan and manage payments diligently. As we move through 2026, consumer credit trends remain in flux: FICO’s 2025 report notes that the average score fell as Americans faced rising costs and resumed student-loan payments . By focusing on payment discipline, monitoring your credit and diversifying your credit mix, you can improve your financial profile even in a challenging environment.

Get Started With Cash

If you’re ready to explore whether a personal loan fits your financial plan, Cash offers a simple way to check your eligibility without affecting your credit score. Our quick online form connects you with loan options tailored to your needs. Whether you’re rebuilding your credit or seeking funds for an emergency, submitting your form at Cash.com is the first step toward better financial health.

Have questions? Visit our FAQs or reach out to our support team. Building credit is a journey—Cash.com is here to help you navigate it confidently.