Personal loans can have varying effects on credit scores depending on an individual's credit history [d9151503]. Taking out a personal loan can be a strategic move to consolidate debt or refinance credit card debt, potentially leading to lower interest rates and more manageable payments [d9151503]. However, it is important to understand how personal loans can impact credit scores.
When an individual applies for a personal loan, the lender typically performs a hard inquiry on their credit report [d9151503]. This inquiry can temporarily lower the individual's credit score by a few points. However, the impact is usually minimal and short-lived, especially if the individual has a strong credit history and does not have multiple recent inquiries.
Once the personal loan is approved and the borrower starts making timely payments, it can have a positive impact on their credit score [d9151503]. Making consistent payments demonstrates responsible financial behavior and can improve the borrower's creditworthiness over time. On the other hand, missing payments or defaulting on the loan can have a significant negative impact on the credit score.
It is worth noting that taking out a personal loan can also affect credit utilization, which is the ratio of credit used to the total credit available [d9151503]. If the personal loan is used to consolidate credit card debt, it can lower the credit utilization ratio and potentially improve the credit score. However, if the individual continues to accumulate debt on their credit cards after taking out the loan, it can increase the credit utilization ratio and negatively impact the credit score.
In addition to the impact of personal loans on credit scores, there is a proposed rule by the Consumer Financial Protection Bureau (CFPB) to remove medical bills from credit reports and prevent credit reporting agencies from sharing medical debt information with lenders [14ab6602]. The rule would also forbid lenders from basing their lending decisions on medical information. If finalized, the rule would remove existing medical collections from credit reports and prevent credit reporting companies from sending medical information to lenders going forward [14ab6602]. This proposed rule is expected to be finalized in early 2025, and the CFPB is accepting feedback on the proposal until August 12 [14ab6602].
The potential removal of medical debt from credit reports could have a significant impact on individuals with medical debt on their credit reports. On average, they may see a 20-point bump in their credit scores [14ab6602]. The rule would also provide protections that could impact consumers' health and safety, such as preventing lenders from taking medical devices as collateral for loans or repossessing medical devices if a loan isn't repaid [14ab6602]. However, there will still be limited circumstances where medical information could still be used in credit decisions, such as disability income or medical forbearance eligibility [14ab6602].
A recent proposal by the Biden administration aims to prevent medical debt from affecting individuals' credit history [4f9eebe3]. If enacted, this policy change would impact millions of Americans. The proposal seeks to remove medical debt from credit reports, preventing it from negatively impacting credit scores. Leah Dempsey, the former vice president and senior counsel at ACA International, joins CBS News to discuss her take on the proposal [4f9eebe3].
In summary, personal loans have the potential to impact credit scores both positively and negatively. It is important for individuals to carefully consider their financial situation and credit history before taking out a personal loan. By making timely payments and managing their credit responsibly, borrowers can use personal loans as a tool to improve their creditworthiness and achieve their financial goals [d9151503]. Additionally, the potential removal of medical debt from credit reports, as proposed by the CFPB and the Biden administration, could have significant implications for individuals with medical debt, potentially improving their credit scores and providing additional protections [14ab6602] [4f9eebe3]. It is advised for consumers to regularly check their credit reports for accuracy, dispute any errors, and make a plan to deal with any medical debt they may have [14ab6602].