How much does a loan affect your credit score in the UK?

Taking out a loan can feel like a double-edged sword. On one hand, it’s an opportunity to reach your financial goals and make important purchases — plus, you can use it to build your credit history and show lenders you’re responsible with debt. On the other hand, it can also lead to temporary dips in your score and potentially complicate your financial picture.

So, how much does a loan really affect your credit score? Whether you’re thinking of applying for a personal loan, a mortgage, or even a payday loan, understanding the nuances of how loans impact your credit can help you make smarter borrowing decisions.

Let’s dive into the details and explore both the positive and negative effects loans can have on your credit score.

How loans impact your credit score

Loans can affect your credit score, both positively and negatively. Let’s explore how.

Positive impacts from loans

You build your payment history: Your payment history is the biggest factor influencing your credit score. After all, lenders are most concerned with whether they’ll be making a mistake by lending to you. So, if you make consistent payments on a loan, it can tell lenders you’re a safe person to lend to, increasing your credit score.
You diversify your credit mix: Having a mix of credit — like a mortgage, personal loans, and credit cards — can tell lenders that you’re able to manage credit responsibly. Because it’s essential for lenders to know that, a strong credit mix can boost your credit score.

Negative impact from loans

Hard searches cause temporary dips: When you apply for a loan, lenders will perform a hard credit check or inquiry to fully assess your creditworthiness. These searches cause a temporary dip in your credit score because they indicate that your credit situation could be about to change. Typically, a hard search’s impact is short-lived, and your score should recover within a year if you haven’t added any other negative markers. However, keep in mind that having multiple hard credit searches pulled in a brief period can lead to a larger decrease.
Increased debt: If you already have debt, taking out a new loan can increase your total debt and raise questions about your ability to make repayments. This can lead to a decrease in your credit score.

The initial dip explained

Even if you have good credit, taking out a loan can cause a temporary dip in your credit score. There are a few reasons for that, so let’s take a closer look at them here.

The hard credit inquiry: As we mentioned earlier, the hard credit check that your lender runs when you apply will temporarily lower your score. But remember, this usually goes away within a year.
Changes to your length of credit history: A factor that influences your credit score is how old your credit is. Again, this is important for your credit score because of what it tells lenders: the longer you’ve had credit going, the longer they can see how you’ve handled it. Opening a new loan account will lower the average age of your credit accounts, which can have a negative impact on your credit score. However, if you make regular payments, this impact should fade with a bit of time.
New loans change your credit mix over the short term: If your credit mix is loan-heavy before getting your new loan, you could see your credit score drop when you add another loan. Too much of a single type of credit can indicate to lenders that you’re reliant on it, so make sure you balance your credit mix.

How different types of loans impact your credit score

While loans can impact your credit score in many different ways, it’s also critical to note that those effects can be influenced by the type of loan you’re taking out. To clarify what the impact on your score might be, let’s take a closer look at how loans other than personal loans can impact your credit score.

Mortgages

Mortgages have a significant effect on your credit score. In particular, this is because of the large sums and lengthy payment terms involved.

A hard credit check and initial loan can cause a dip in your credit score. However, when you make regular payments as you work down your mortgage, it’s a signal to lenders that you can meet long-term credit commitments.

A mortgage will typically have a significant impact on your credit score, largely due to the higher balance and longer payment terms. Like a personal loan, you’ll see an initial dip in your score, but over time it may significantly improve your score (assuming that you’re making your monthly payments). A current mortgage without missed payments indicates that you can meet your long-term credit commitments — something that lenders love to see.

Student loans

In the UK, student loans aren’t reported to credit reference agencies. Therefore, they don’t influence your credit score. However, you should keep in mind that while your student loans won’t impact your credit score, they can still impact your eligibility for forms of financing like a mortgage. This is because your student loans are still visible to potential lenders, who’ll probably factor your student loans into your debt-to-income ratio when assessing your eligibility for a mortgage.

Payday loans

In theory, payday loans and other forms of high-interest debt are no different than other forms of borrowing and shouldn't have any unique impact on your credit score. However, their terms may lead to situations that cause a drop in your credit score.

Lenders commonly view payday loan use as a sign of financial distress and might reject loan applicants who use or have used payday loans. Plus, payday loans’ sky-high interest rates can cause you to rapidly accrue interest and debt on your loan balance.

Tips for minimising a loan’s impact on your credit score

Taking out a loan will always impact your credit score. Unfortunately, there’s not a ton that can be done about it. However, you can take steps to minimise the adverse effects while maximising the positive impacts. Start with these tips:

Only take out loans you know you can pay back. Overextending yourself unnecessarily increases the risk of defaulting on your payments and damaging your credit score.
Create a concrete payment plan. Whenever possible, use automatic payments and make calendar reminders.
Check your credit report frequently to ensure there are no errors and understand what’s influencing your score.
Avoid applying for multiple loans to minimise the impact of hard credit checks

The bottom line: loans’ impact on your credit score vary

Applying for credit of any kind can affect your overall credit rating, and loans are no exception. Before you apply for a loan, take the time to verify that it’s what you need to reach your goals, balance the benefits and the overall impact on your credit score, and establish a plan for making the payments.

If you’re worried that your credit profile isn’t strong enough for a loan right now, consider taking steps to build it. One of the best ways to increase your credit score is by improving your payment history, and there are lots of great tools out there that can help you. Some of the best include:

Credit builder loans require you to make monthly payments into an account. Unlike with a regular loan, you must complete the payments before the loan is released to you. Credit builder loans can help you boost your credit score by improving your payment history — the most important factor influencing your credit score.
Credit builder cards work the same way as credit builder loans, but with a card. They’re essentially prepaid credit cards with the added bonus that your payments can boost your credit score.
Credit builder apps like Pave can help you build and protect your credit score. Pave protects your credit score from further damage by monitoring your bank accounts and notifying you when you have bills coming up. And with Pave’s credit builder account, you can establish a strong payment history just like when you use a credit builder loan or card. Plus, Pave Plus users can monitor their score — with both Equifax and TransUnion — directly in the app.