How Much Does a Loan Affect Your Credit Score UK

How Much Does a Loan Affect Your Credit Score UK

Taking out a loan is a common way to finance larger expenses like buying a car, consolidating debt, or covering home improvements. But if you’re thinking about applying for one, it’s natural to ask: how much does a loan affect your credit score in the UK?

The short answer is that a loan can both help or harm your credit score, depending on how you manage it. The impact depends on the size of the loan, how you repay it, your overall financial history, and the way lenders report to credit reference agencies.

In this article, we’ll explain how a loan affects your credit score in the UK, what to expect in both the short and long term, and how to make sure your borrowing supports — not damages — your credit health.

What Is a Credit Score and How Is It Calculated

Your credit score is a three-digit number used by lenders to assess how likely you are to repay what you borrow. In the UK, there are three main credit reference agencies:

• Experian (score range 0 to 999)

• Equifax (score range 0 to 1000)

• TransUnion (score range 0 to 710)

Each uses its own scoring model, but the main factors influencing your score include:

• Payment history

• Credit utilisation

• Length of credit history

• Types of credit used

• Recent credit applications

Taking out a loan affects several of these factors at once.

How a Loan Can Affect Your Credit Score

1. Short-Term Dip from Hard Search

When you apply for a loan, the lender performs a hard credit check. This search is recorded on your credit report and may cause a temporary drop of 5 to 10 points. Multiple hard searches within a short time can have a larger impact and may suggest financial instability.

2. Increased Credit Mix

Adding a loan to your credit profile improves your credit mix if you primarily have revolving credit like credit cards. This shows lenders you can manage different types of credit, which can help boost your score over time.

3. Improved Payment History

Each on-time loan payment is a positive signal to credit agencies. Payment history is the most influential factor in your credit score, so a loan repaid consistently and in full will gradually improve your credit rating.

4. Higher Total Debt Level

Taking out a loan increases your overall outstanding debt. This can affect your affordability assessments and make other lenders cautious. If you already have high debts, your score might dip until you start repaying the new loan.

5. Debt Consolidation Benefits

If you’re using a loan to consolidate credit card debt, this can help reduce your credit utilisation ratio. Lower utilisation often leads to an improved credit score — especially if you close or stop using the cards you’ve paid off.

How Much Does a Loan Help Your Score Over Time

Assuming you make every payment on time, a loan can improve your credit score by 50 to 100 points or more over its term. The benefits will not be instant but will build steadily with each successful monthly payment.

However, if you miss even one payment, it could reduce your score by 50 points or more, depending on your previous credit behaviour. Missed payments remain on your report for six years and are one of the biggest red flags for lenders.

Real-World Example

Ben took out a £7,000 personal loan to consolidate credit card debt. His Experian score initially dropped by 15 points due to the hard search and new account. Over the next 12 months, his score improved by 70 points as he made consistent repayments and reduced his overall credit card balances.

Meanwhile, Sarah missed two payments on a car loan after a change in income. Her Equifax score dropped by over 100 points, and it took more than a year of timely payments to recover.

Tips to Use a Loan to Improve Your Credit Score

• Only borrow what you can afford to repay

• Make every payment on time without fail

• Set up direct debits to avoid missed or late payments

• Avoid applying for multiple loans at once

• Use the loan to reduce other debts, not increase your total borrowing

• Monitor your credit report regularly using free services like Experian, Credit Karma or ClearScore

What Happens When You Pay Off a Loan

Once you repay your loan in full:

• The account is marked as settled on your credit report

• Your credit score may increase slightly due to reduced debt

• A positive repayment history remains on your file for six years, which helps future borrowing

Be aware that closing a well-managed loan account can reduce your credit mix slightly, but the effect is usually minimal compared to the benefit of reducing your debt load.

Final Thought

Taking out a loan affects your credit score, but whether it helps or hurts depends on how you manage the debt. A loan can improve your credit score significantly over time through regular, on-time payments and responsible borrowing. On the other hand, missed payments or overextending yourself financially can cause serious damage to your credit profile.

Before applying, check your credit file, compare loan options carefully and ensure the repayments are within your budget. Used wisely, a loan can be a powerful tool for improving your financial health and boosting your credit score in the long term.