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You may have heard that consolidating your debts can hurt your credit score. So, if you’re considering this financial strategy to free up cash flow and otherwise streamline debts, it’s natural to wonder if that’s true. And like so many questions related to finances, the answer depends upon your specific situation.

It’s important to remember that a combination of many factors can affect credit scores and to understand how those factors are considered in credit score algorithms. We’ll use FICO® as an example—according to them, the high-level breakdown of credit scores is as follows:

•  Payment history (35%): This includes delinquent payments and information found in public records.

•  Amount currently owed (30%): This includes money you owe on your accounts, as well as how much of your available credit on revolving accounts is currently used up.

•  Credit history length (15%): This includes when you opened your accounts and the amount of time since you used each account.

•  Credit types used (10%): What is your mix? For example, how much is revolving credit, like credit cards? How much is installment debt, such as car loans and personal loans?

•  New credit (10%): How much new credit are you pursuing?

Now, here is information to help you make the right debt consolidation decision.

Benefits of Debt Consolidation

When you’re juggling, say, multiple credit cards, it can be easy to accidentally miss a payment. Depending on the severity of the mistake, that can have a negative impact on your credit score. This, in turn, can make it more challenging to get loans when you need them, or prevent you from getting favorable loan terms, like low interest rates. Plus, even if you don’t miss a payment, when you have numerous credit card bills to juggle, you probably worry that one will get missed.

Plus, it’s not uncommon for credit cards to have high interest rates, and when you only make the minimum payments on each of them, you very well may be paying a significant amount of money each month without seeing balances drop very much at all.

So, when you combine multiple credit cards into one loan, preferably one with a lower interest rate, it’s much more convenient, making it less likely that you’ll accidentally miss a payment. And paying less in interest will likely make it easier to pay down your debt.

How you handle your debt consolidation, though, and the way in which you manage your finances after the consolidation each play significant roles in whether this strategy will ultimately help you.

Steps to Take: Before the Debt Consolidation Loan

Debt accumulates for different reasons for different people. For some, unexpected medical bills or emergency home repairs have served as culprits. For others, being underemployed for a period of time may have caused them to start carrying a credit card debt balance. For still others, it may be about learning how to budget more effectively.

No matter why credit card debt has built up, it can help to re-envision a debt consolidation strategy as something bigger and better than just combining your bills. As part of your plan, analyze why your debt accumulated and be honest about which ones were under your control and which were true emergencies.

And if you end up using a lower-cost loan to consolidate your bills, consider using any money saved to build up an emergency savings fund to help prevent the accumulation of credit card balances in the future.

The reality is that, if you consolidate your debts in conjunction with a carefully crafted budgeting and savings plan, then debt consolidation can be a wonderful first step in your brand-new financial strategy.

Debt Consolidation: When It Can Help Your Credit Score

Based on the factors used by FICO, here are ways in which a consolidation loan can help credit scores:

Payment history (35%)

Because making payments on time is the largest factor in FICO credit scores, a debt consolidation loan can help your credit if you make all of your payments on time.

Amount currently owed (30%)

Although you may not instantly reduce the amount you owe by, say, consolidating all of your credit card balances into a personal loan, there can be a benefit to your credit score here. That’s because the credit score algorithm looks at credit limits on your cards, as well as your outstanding balances, and creates a formula that calculates your credit card utilization.

Here is more information about credit card utilization, including how to calculate and manage yours.

Credit types used (10%)

As you may know, there are several different types of credit, such as credit cards, retail accounts, installment loans, finance company accounts, and mortgage loans. According to myFICO , responsibly using a mix of these, such as credit cards and installment loans, may help your credit score.

However, it’s certainly not necessary to have one of each, and it’s not a good idea to open credit accounts you don’t intend to use.

Debt Consolidation: When It Can Hurt Your Credit Score

Now, here are ways that the same initial step—taking out a debt consolidation loan—may hurt your credit.

Payment history (35%)

As is the case with most loans, making late payments on a consolidation loan can hurt your credit score (depending on the severity of the situation). Loans in a delinquent status are mostly likely to have a negative impact on your credit, depending on the lenders’ policies.

Learn more about payment history .

Amount currently owed (30%)

Now, let’s say that you pay off all your credit cards with a personal loan and then you begin using them again to the degree that you can’t pay them off monthly. Any gain that you saw in your credit score will likely disappear as your credit utilization numbers rise again.

Another way that credit consolidation can harm your score is if you combine all of your credit card balances to just one credit card, resulting in a high utilization rate. But if you are able to keep it relatively low, it is less likely to negatively affect your score.

Learn more about amounts owed .

Credit history length (15%)

If you close credit cards that you pay off, you’ll reduce the age of your accounts, overall, and this can hurt your credit score.

Learn more about length of credit history .

Credit types used (10%)

If you combine all of your credit card balances into just one credit card, as described above, you won’t have opened an installment (personal) loan, so that won’t help with diversifying credit types.

Learn more about credit mix .

New credit (10%)

If you apply for a personal loan or a balance-transfer credit card and are rejected, this can cause your credit score to decrease. And if you apply for multiple loans or credit cards, looking for a lender that will accept your application, this can also hurt your score. Multiple requests for your credit report information (known as “inquiries”) in a short period of time can decrease your score, though not by much.

Learn more about new credit .

Concerned about building or rebuilding credit? Check out a few tips SoFi put together on how to strategically boost your credit score.

Investigating a Personal Loan for Debt Consolidation

When it’s time to apply for the personal loan, you’ll want to get a low rate. In February 2019, the average credit card interest rate was reported as 17.67%; this means that, by not consolidating your credit cards into a personal loan with a lower interest rate, you could be paying more interest than if you did.

When choosing a lender, ask about the fees associated with the loan. Some lenders charge fees; others,like SoFi, don’t. You can always use a lender’s annual percentage rates (APRs) as a way to understand the true cost of financing.

Also, you may consider calculating the shortest loan term that your budget can comfortably accommodate because, the more quickly you pay off the debt, the more money you’ll save over the life of the loan because you’re paying less in interest.

You can find more information about saving money as you consolidate your debts, and you can also calculate payments using our personal loan calculator.

Consolidate Your Debt with a SoFi Personal Loan

If you’re ready to say goodbye to high-interest credit cards and to juggling multiple payments each month, a SoFi personal loan may be a good option.

Benefits of our personal loans include:

•  Fast, easy, and convenient online application process

•  Low interest rates

•  No origination fees required

•  No prepayment fees required

•  Fixed rate loan

You deserve peace of mind. And by taking out a personal loan to consolidate debt, the stress of juggling multiple credit card payments can be history. Ready for your fresh start?

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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While paying off your credit cards can have a positive effect on your credit profile, this isn’t always the case. Depending on the strategy you use to wipe away your debt, you could (inadvertently) do some damage to your scores. This could make it harder to get a mortgage, car loan, or even a rental agreement in the future. Here’s what you need to know to pay down your credit obligations while protecting your credit.

What Not to Do: Ignoring Credit Card Debt

When it comes to credit card debt, the consequences of avoidance and procrastination are steep, both to your financial well-being and to your credit scores. Here’s a look at the potential fallout.

•  Interest charges will pile up: Generally, the longer you avoid paying down your debt, the more interest will accrue. The average interest rate on credit cards as of July 2025 is 20.13%. This means that even if your debt isn’t growing through new purchases, interest alone can make your balance balloon over time.

•  Late fees and credit damage: Credit card issuers usually charge fees if you don’t make the minimum payment by the due date. After 30 days of no payment, your issuer will likely report the missed payment to the credit bureaus, which can do significant damage to your credit profile.

•  Debt collection and legal consequences: Ignoring credit card debt for too long could lead to the debt being sent to a collection agency, a third party that can be aggressive in pursuing repayment. In extreme cases, your creditors might sue you, potentially leading to wage garnishment or seizure of personal assets.

Best Ways to Pay off Debt Without Hurting Credit

When managed carefully, paying off debt can actually have a positive impact on your credit profile. The key is to use tactics that reduce your balances without negatively impacting your payment history, credit utilization, or credit mix.

Consolidate Credit Card Debt

Credit card consolidation involves combining multiple debts into a single loan, such as a debt consolidation loan, ideally with a lower interest rate. This approach can make repayment more manageable and may reduce the total interest you pay. You’ll still need to make consistent monthly payments, but streamlining your bills into one can reduce your chances of missing a due date.

As long as you make on-time payments, your credit profile may benefit from the reduced credit utilization and positive payment history.

💡 Quick Tip: Everyone’s talking about capping credit card interest rates. But it’s easy to swap high-interest debt for a lower-interest personal loan. SoFi credit card consolidation loans are so popular because they’re cheaper, safer, and more transparent.

Balance Transfer

A balance transfer involves moving high-interest credit card debt to a new card with a lower interest rate — ideally one with a 0% introductory annual percentage rate (APR). This strategy can give you a temporary break from interest charges, allowing you to pay off the principal more quickly.

To avoid credit score harm, don’t close old cards after transferring the balance — doing so can reduce your available credit and increase your utilization ratio. It’s also important to pay off the balance before the promotional period ends, or you may face high interest rates (again). Some balance transfer cards offer a 0% APR for as long as 20 months.

Automate Payments

Late or missed payments are among the biggest threats to your credit scores. Automating payments ensures your minimums are paid on time every month, which protects your payment history, a key factor in your credit score.

You can set up automatic payments through your bank or directly with your credit card issuer. You can always make additional manual payments to reduce the balance faster.

Debt Snowball vs. Debt Avalanche Payoff Strategies

One of the best ways to pay off debt without hurting credit is to use a DIY payoff plan. Here are two popular strategies for whittling down multiple debts:

•  Debt avalanche method: Here, you make extra payments on the credit card with the highest interest rate first, while making minimum payments on the others. Once the highest-rate card is paid off, you funnel those extra funds toward the card with the next-highest rate, and so on. This strategy minimizes the amount of interest you’ll pay over time.

•  Debt snowball method: With this approach, you put extra payments toward the card with the smallest balance first, while making minimum payments on the others. When that card is cleared, you focus on paying off the next-smallest balance, and so on. This gives you quick wins and a psychological boost, which can help you stay motivated.

Negotiating and Settling Credit Card Debt

Sometimes, repayment in full isn’t realistic. In those cases, negotiating with your creditor may provide relief while minimizing damage to your credit.

Workout Agreement

With this arrangement, the credit card company may agree to lower your interest rate or temporarily waive interest altogether. They may also be willing to take additional steps to make it easier for you to repay your debt, such as waiving past late fees or lowering your minimum payment.

Because this agreement is informal and not reported as negative to credit bureaus, it can help you pay off debt without hurting your credit, provided you uphold your end of the deal.

Debt Settlement

In a debt settlement, the credit card company agrees to accept less than the full amount you owe, forgive the rest, and close the account. While this might seem appealing, a debt settlement comes with consequences. A settled debt becomes a negative entry on your credit report, where it can stay for seven years. You’ll want to consider debt settlement as a last-resort option, and also be cautious of third party settlement companies that charge high fees or make unrealistic promises.

Hardship Agreement

Some card issuers offer a hardship or forbearance program for borrowers who are experiencing a temporary financial setback, such as a job loss, illness, or injury. Under these programs, the company may agree to lower your interest rate, even temporarily suspend payments. Keep in mind that the issuer might freeze your account while you’re enrolled, which means you won’t be able to use your card. Also, if the plan extends your repayment term, it could increase the total amount of interest you pay.

While a hardship program typically doesn’t impact your credit, it could if the card issuer decides to close your account or lower your available credit.

What Is the Statute of Limitations on Credit Card Debt?

The statute of limitations on debt governs how long a creditor or collection agency can sue you for nonpayment of a debt. The statute of limitations on credit card debt varies from state to state, but is typically between three and six years. Once the statute of limitations has passed, debt collectors can’t win a court order for repayment.

Even if your credit card debt is past the statute of limitations, however, it doesn’t magically disappear. Negative entries — such as late or missed payments, accounts sent to collections, and accounts not paid as agreed — generally stay on your credit report for seven years. These negative marks can lower your credit scores, making it hard to qualify for new credit cards and loans with attractive rates and terms in the future.

Does Credit Card Debt Consolidation Hurt Your Credit?

Debt consolidation can cause a temporary dip in your credit scores, mostly due to the hard inquiry from the loan application and the new account appearing on your report. However, the long-term effects are often positive if you manage the new loan responsibly.

By reducing your credit utilization ratio and maintaining on-time payments, debt consolidation can have a net positive effect on your credit profile over time. The key is to avoid racking up new balances while paying off the consolidated loan.

Recommended: What Is a Credit Card Interest Cap?

How to Consolidate Credit Card Debt Without Hurting Your Credit

The right strategy can help you consolidate debt while protecting or even building your credit.

Consider Debt Consolidation Options

Start by exploring the types of consolidation available — personal loans, balance transfer credit cards, and home equity loans/lines of credit (HELOCs) can all be used to pay off your credit cards and streamline repayment. It’s important to compare interest rates, terms, and fees to find the best fit for your situation.

An online debt consolidation calculator can show you exactly how much interest you could save by paying off your existing credit card (or cards) with a new loan or line of credit.

Get Prequalified

Before applying, see if you can prequalify for a consolidation loan. Prequalification uses a soft credit inquiry and won’t impact your score. It can give you an idea of the interest rate and terms you might receive and help you make an informed choice before formally applying for the loan.

Stop Using Your Credit Cards

Once you consolidate your balances, it’s a good idea to stop or limit use of your consolidated cards. While it’s wise to keep those accounts open (to maintain your credit history and limit), continuing to run up balances on those cards can lead to even more debt, undermining the purpose of consolidation and damaging your credit utilization ratio.

Pay Bills On Time

Payment history is generally the most important factor in your credit scores — it makes up 35% of your overall FICO® credit score. So paying your consolidated loan or transferred balance on time is critical. Even a single late payment can lead to a negative mark on your credit reports and undo some of your progress.

Set up reminders or automate payments to stay on track and build positive credit habits.

Recommended: FICO Score vs Credit Score

The Takeaway

Credit card debt can be a major financial burden, but it doesn’t have to ruin your credit or your financial future. By facing your debt and adopting a planned approach, you can gradually reduce what you owe. Whether you choose to use a paydown strategy (like avalanche or snowball), negotiate with creditors, or explore a consolidation loan, there are various strategies to help you regain control of your finances while protecting — and ultimately building — your credit.

Whether or not you agree that credit card interest rates should be capped, one thing is undeniable: Credit cards are keeping people in debt because the math is stacked against you. If you’re carrying a balance of $5,000 or more on a high-interest credit card, consider a SoFi Personal Loan instead. SoFi offers lower fixed rates and same-day funding for qualified applicants. See your rate in minutes.

FAQ

Can paying off credit card debt improve my credit score?

Paying off credit card debt can have a positive impact on your credit profile. It lowers your credit utilization ratio (the percentage of available credit you’re currently using), which is a major factor in your credit scores. A lower utilization rate suggests responsible credit management. Making consistent, on-time payments while reducing debt also adds to your positive payment history, which is another key factor in your scores.

Will settling credit card debt hurt my credit?

Settling credit card debt can negatively impact your credit, at least temporarily. When you settle a debt for less than the full amount owed, it may be reported to the credit bureaus as “settled” rather than “paid in full.” This status indicates that you didn’t repay the full debt and the entry can remain on your credit report for up to seven years. However, settling is still better than leaving debts unpaid or going into default.

How long does credit card debt stay on your credit report?

Negative information related to credit card debt — such as late payments, charge-offs, and collection accounts — generally remains on your credit report for seven years. However, positive information — like closed accounts paid as agreed — can stay on your report for up to ten years, helping your credit history. Active accounts in good standing stay on your report as long as the account is open and the lender is reporting it to the credit bureaus.

Is using a personal loan to pay off credit cards a good idea?

Using a personal loan to pay off credit cards can be a smart move if the loan offers a lower interest rate. This strategy, known as debt consolidation, can simplify payments and reduce interest costs. It can also improve your credit utilization ratio (the percentage of available credit you are currently using), which is factored into your credit scores. However, it’s important to have a solid repayment plan and avoid taking on more credit card debt, or the benefits could be short-lived.

What is the best way to pay down high-interest credit card debt?

One of the best ways to pay down high-interest credit card debt is using the avalanche method. This involves making extra payments on the card with the highest interest rate while making minimum payments on others. Once that card is paid off, you funnel the extra payment to the card with the next-highest rate, and so on. This minimizes the total interest paid over time. Another good option is to transfer your balances to a card with 0% introductory APR or a lower-interest personal loan. Whichever method you choose, consistent, above-minimum payments and avoiding new debt are key to getting ahead.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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What’s your number? That’s not a pickup line; it’s the digits a mortgage lender will want to know — your credit score for a mortgage application. Credit scores range from 300 to 850, and for most mortgage-seekers, a good credit score to buy a house is at least 620. The lowest interest rates usually go to borrowers with scores of 740 and above whose finances are in good order, while a score as low as 500 may qualify some buyers for a home loan, but this is less common.

Why Does a Credit Score Matter?

Just as you need a résumé listing your work history to interview for a job, lenders want to see your borrowing history, through credit reports, and a snapshot of your habits, expressed as a score on the credit rating scale, to help predict your ability to repay a debt.

A great credit score vs. a bad credit score can translate to money in your pocket: Even a small reduction in a homebuyer’s mortgage rate can save thousands of dollars over time.

Do I Have One Credit Score?

You have many different credit scores based on information collected by Experian, Transunion, and Equifax, the three main credit bureaus, and calculated using scoring models usually designed by FICO® or a competitor, VantageScore®.

To complicate things, there are often multiple versions of each scoring model available from its developer at any given time, but most credit scores fall within the 300 to 850 range.

Mortgage lenders historically have focused on FICO scores. Here are the categories:

•   Exceptional: 800-850

•   Very good: 740-799

•   Good: 670-739

•   Fair: 580-669

•   Poor: 300-579

Here’s how FICO weighs the information:

•   Payment history: 35%

•   Amounts owed: 30%

•   Length of credit history: 15%

•   New credit: 10%

•   Credit mix: 10%

Mortgage lenders will pull an applicant’s credit score from all three credit bureaus. If the scores differ, they will use the middle number when making a decision.

If you’re buying a home with a non-spouse or a marriage partner, each borrower’s credit scores will be pulled. The lender will home in on the middle score for both and use the lower of the final two scores (except for a Fannie Mae loan, when a lender will average the middle credit scores of the applicants).

Recommended: 8 Reasons Why Good Credit Is So Important

What Is the Minimum Credit Score to Buy a House?

The median FICO score for homebuyers in late 2025 was a very healthy 735, according to Realtor.com® data. Fortunately, not everyone buying a home will need a score this high to qualify for a home loan. After all, the median credit score in the U.S. is 715. (Using the median versus the average credit score necessary to buy a house helps ensure that unusual buyers with extremely high or low scores don’t throw off the calculations.) How low can you go and still buy a house? The answer hinges on your mortgage.

Credit Score Requirements by Loan Type

What credit score do you need to buy a house? The answer will depend on the type of mortgage loan you’re seeking. If you are trying to acquire a conventional mortgage loan (a loan not insured by a government agency) you’ll likely need a credit score of at least 620. The best credit score to buy a house is 740 or better, because that will help you obtain a lower interest rate. But many buyers purchase a home with a lower score.

With an FHA loan (backed by the Federal Housing Administration), 580 is the minimum credit score to qualify for the 3.5% down payment advantage. Applicants with a score as low as 500 will have to put down 10%.

Lenders like to see a minimum credit score of 620 for a VA loan, though some will go lower, to 600.

A score of at least 640 is usually required for a USDA loan, though borrowers with strong compensating factors, such as a healthy savings, might qualify at 620.

A first-time homebuyer with good credit will likely meet FHA loan requirements, but a conventional mortgage will probably save them money over time. One reason is that an FHA loan requires upfront and ongoing mortgage insurance that lasts for the life of the loan if the down payment is less than 10%.

Steps to Improve Your Credit Score Before Buying a House

Working to build credit over time before applying for a home loan could save a borrower a lot of money in interest. A lower rate will keep monthly payments lower or even provide the ability to pay back the loan faster. Here are some ideas to try:

1.    Pay all of your bills on time. “Payment history makes a bigger impact on a person’s credit score than anything else — 35%. So the most important rule of credit is this: Don’t miss payments,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi.

2.    Check your credit reports. Be sure that your credit history doesn’t show a missed payment in error or include a debt that’s not yours. You can get free credit reports from the three main reporting agencies. To dispute a credit report, start by contacting the credit bureau whose report shows the error. The bureau has 30 days to investigate and respond.

3.    Pay down debt. Installment loans (student loans and auto loans, for instance) affect your DTI ratio, and revolving debt (think: credit cards and lines of credit) plays a starring role in your credit utilization ratio. Credit utilization falls under FICO’s heavily weighted “amounts owed” category. A general rule of thumb is to keep your credit utilization below 30%.

4.    Ask to increase the credit limit on one or all of your credit cards. This may improve your credit utilization ratio by showing that you have lots of available credit that you don’t use.

5.    Don’t close credit cards once you’ve paid them off. You might want to keep them open by charging a few items to the cards every month (and paying the balance). If you have two credit cards, each has a credit limit of $5,000, and you have a $2,000 balance on each, you currently have a 40% credit utilization ratio. If you were to pay one of the two cards off and keep it open, your credit utilization would drop to 20%.

6.    Add to your credit mix. An additional account may help your credit, especially if it is a kind of credit you don’t currently have. If you have only credit cards, you might consider applying for a personal loan.

How Long It Takes to See Changes in Credit Score

Working on your credit scores may take weeks or longer, but it can be done. Should you find an error in a credit report, you can expect it to take up to a month for your score to change. And if you haven’t been paying bills on time, it could take up to six months of on-time payments to see a significant change.

Other Factors Besides Credit Score That Affect Mortgage Approval

Credit scores aren’t the only factor that lenders consider when reviewing a mortgage application. They will also require information on your employment, income, debts, and bank accounts. Your down payment will be a factor as well. Putting 20% down is desirable since it often means you can avoid paying PMI, private mortgage insurance that covers the lender in case of loan default. But many homebuyers — particularly first-time buyers — put down less than 20% and simply factor PMI into their monthly budget.

Other typical conventional mortgage loan requirements a lender will consider include:

Debt-to-Income Ratio

Your debt-to-income ratio is a percentage: the total of your monthly debts (car payment, student loan payment, alimony, etc) divided by your gross monthly income. Most lenders require a DTI of 43% or lower to qualify for a conforming loan. Jumbo loans may have more strict requirements.

Employment and Income History

A mortgage lender will want to verify your employment and income and may request pay stubs and w-2 statements. Don’t be surprised if the lender also reaches out to your employer to confirm your employment. If you are self-employed, you may be asked for a profit-and-loss statement for your business and for more than a year or two of tax returns. Lenders are looking for borrowers who have a steady income source and can be relied upon to repay a large sum over a long period of time.

Available Savings and Assets

Having cash reserves or investments that you can liquidate in the event that you need to pay your mortgage bill is another factor a prospective lender will consider. So lenders will ask you for information about your accounts, including savings and 401(k) accounts. The lender is also looking to be sure that you have the resources to cover the down payment amount and closing costs related to the home purchase.

A lender facing someone with a lower credit score may increase expectations in other areas like down payment size or income requirements.

If you want to see how all these factors come together in your financial profile to determine what size loan you might be approved for, you can first prequalify for a mortgage with multiple lenders. Ultimately, you may want to seek out mortgage preapproval from at least one lender so you have a very clear picture of your home-buying budget and can move forward swiftly when you find a home you love.

Recommended: 31 Ways to Save for a House

The Takeaway

What credit score is needed to buy a house? The number depends on the lender and type of loan, but most homebuyers will want to aim for a score of 620 or better. A better credit score is not always necessary to buy a house, but it may help in securing a lower interest rate.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.

FAQ

What credit score is considered good for buying a house?

Generally speaking, you’ll want a credit score of 620 or better if you are looking at a conventional loan or VA loan. A USDA loan would require at least 640 from most borrowers. An FHA loan offers more lenient terms: You could qualify with a score as low as 500, though 580 will allow you to put down a low, 3.5% down payment.

Can I buy a home with a low credit score?

It is possible to get a mortgage and purchase a home with a credit score as low as 500 if you obtain an FHA loan and put down a 10% deposit. If you are looking at a different loan type, then you will likely need at least a 620 score, though if you have a healthy savings and solid income, you may be able to squeak by with a slightly lower credit score.

Do mortgage lenders use FICO or VantageScore?

Mortgage lenders have historically relied on FICO scores but now can use either FICO or VantageScore for loans delivered to Fannie Mae and Freddie Mac, the two entities that buy mortgages from lenders, thereby guaranteeing most of the mortgages in the U.S.

How can I improve my credit score before applying for a mortgage?

The most important thing you can do to help nurture your credit score before applying for a loan is to make your payments in full and on time. Other things, such as requesting credit line increases (but not spending up to the limit) or diversifying your credit mix by adding a personal loan to your credit cards, can help. So can not closing old, unused credit cards. But by far, on-time payments should be your number-one goal.

What other factors do lenders look at besides credit score?

A lender considering a mortgage application will look at your income (both the raw number and how consistent your earnings have been). Your debts, and the ratio of debts to income, will also be important, as will your savings in cash and other assets. Your down payment amount could also factor into a lender’s decision about qualifying you for a loan.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.

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A personal loan can be a useful tool for consolidating debt, funding home repairs, or covering unexpected expenses. Taking out a personal loan can also help you build credit over time, provided you use it responsibly. Like any credit product, a personal loan has the potential to either strengthen or weaken your credit profile, depending on how you manage it.

Understanding how personal loans interact with the components of your credit score can help you make smarter borrowing decisions. Let’s explore when a personal loan contributes positively to your credit — and when it doesn’t.

When Does a Personal Loan Help You Build Credit?

Taking out a personal loan can help you build credit under the right circumstances. Here’s how it can positively impact various aspects of your credit profile.

Your Payment History

Payment history is typically the most significant factor in your credit scores, accounting for approximately 35% of your FICO® Score. When you make on-time monthly payments on your personal loan, you’re showing lenders that you’re reliable and responsible.

Each successful payment helps build a positive payment history. Over time, this consistency can have a favorable impact on your credit file, especially if you previously lacked installment loan accounts or had missed payments in your past. A single missed or late payment, on the other hand, can stay on your credit report for up to seven years, so timely payments are crucial.

Your Credit Utilization Ratio

Your credit utilization rate is the percentage of available credit that you’re using on your credit cards and other lines of credit, and is another important factor in your credit scores. While credit utilization typically applies to revolving credit like credit cards, a personal loan can still indirectly improve your utilization ratio. If you use a personal loan to pay off high-interest credit card debt, known as credit card consolidation, your credit card balances will go down, reducing your utilization.

For example, if you owe $4,000 on a card with a $5,000 limit, your utilization is 80%, which is high. But if you use a personal loan to pay off that balance, your credit utilization on that card drops to 0%, which can have a positive impact on your credit file. Keeping your utilization below 30% is generally recommended for maintaining good credit health.

Recommended: Personal Loan Calculator

Your Credit Mix

Your credit mix — meaning the different types of credit you have — accounts for about 10% of your FICO score. Lenders generally like to see that you can manage multiple kinds of credit, such as credit cards (revolving credit) and personal loans (installment credit).

If your credit history includes only revolving accounts, taking out a personal loan can diversify your credit mix, which could positively impact your profile. This diversity shows you’re capable of managing various types of debt responsibly.

Recommended: What Is a Credit-Builder Loan?

When Doesn’t a Personal Loan Help You Build Credit?

While a personal loan can build credit, it’s not a guaranteed outcome. Missteps in how you use or repay the loan can do more harm than good.

Late Payments

As mentioned, late payments can do serious harm to your credit file. If you’re more than 30 days late, lenders may report the delinquency to the credit bureaus. Even a single missed payment can cause your credit score to drop — exactly how much will depend on how late the payment is, your current credit score, and your overall credit history.

Consistently late or missed payments can turn a credit-building opportunity into a long-term financial setback.

Short-Term Loan

Personal loans with very short repayment periods — especially payday loans or high-fee cash advances — typically don’t do anything to positively impact your credit file. In many cases, these loans aren’t reported to the credit bureaus. Even if they are, they may not help you build credit because they don’t show a long-term payment history.

What’s more, frequent borrowing of short-term loans could be a red flag to lenders that you’re struggling to manage your finances.

High Debt-to-Income Ratio

While your debt-to-income (DTI) ratio isn’t part of your credit score, it plays an important role when applying for new credit. DTI ratio is of interest to lenders because it shows what portion of your income is already allocated to debt repayment. If your DTI ratio is relatively high and you add a personal loan, lenders may see you as overextended. This could make it harder to get approved for a mortgage, car loan, or credit card in the future.

Generally, you want to aim for a DTI ratio of 36% or less. This suggests you have a healthy amount of income to afford monthly payments for a new loan or line of credit.

To calculate your current DTI ratio, add up all your monthly debt payments, divide that total by your gross monthly income, and multiply the result by 100. This will give you your DTI ratio as a percentage.

Tips to Maximize the Credit-Building Potential of a Personal Loan

If you’re considering a personal loan as a way to build credit, these strategies can help you use the loan wisely.

Choose a Reasonable Loan Amount

It’s important to only borrow what you can reasonably afford to repay. Before signing the loan agreement, calculate your monthly payments and make sure they fit comfortably within your budget. Stretching your finances to take out a large loan can increase your risk of missing payments — and damage your credit.

Remember, the goal is to build credit, not add financial stress.

Set Up Automatic Payments

To avoid late payments, consider setting up automatic payments through your bank or lender. “Setting up autopay is one way to make sure payments are made regularly and on time,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi.

Most lenders offer autopay options that draft your monthly payment directly from your checking account on the due date. Some even offer a small interest rate discount for using autopay. This strategy helps ensure you never miss a payment and allows you to establish a consistent payment history.

Monitor Your Credit Reports

Regularly checking your credit reports allows you to track the impact of your personal loan and spot any errors or inaccuracies. You’re entitled to a free credit report every week from each of the three major credit bureaus — Equifax®, Experian®, and TransUnion® — at AnnualCreditReport.com.

As you scan your reports, you’ll want to make sure your loan is being reported accurately and that your on-time payments are being recorded. If you notice any mistakes, dispute them with the appropriate bureau promptly.

The Takeaway

So, can a personal loan build credit? Yes — if managed properly, a personal loan can have a positive impact on your credit profile over time. It can do this by adding positive information to your payment history and diversifying your credit mix. If you use a personal loan to pay down credit cards, it can also reduce your credit utilization, which is also factored into your credit scores.

However, the opposite is also true. Late payments and taking on more debt than you can handle can hurt your credit profile instead of helping it.

Ultimately, a personal loan isn’t a quick fix for bad credit, but it can be a strategic part of your long-term credit-building plan. By borrowing responsibly and staying on top of your debt, you can use a personal loan to work towards a stronger financial future.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. See your rate in minutes.

FAQ

Do personal loans raise credit scores?

If managed responsibly, a personal loan can have a positive impact on your credit file. When you make on-time payments, it adds positive payment history to your credit reports, which is a major factor in your score. In addition, a personal loan can improve your credit mix if you mostly have revolving credit like credit cards. However, if you miss payments or take on too much debt, it could negatively affect your profile and make it harder to qualify for credit with attractive terms in the future.

How long does it take to build credit with a personal loan?

How long it will take to start seeing credit impacts from a personal loan will depend on your current financial situation. At the earliest, adding positive information to your credit reports may be factored into your scores a month or two later. However, it can a few more months for any positive measures to make a noticeable impact. If you already have negative information on your reports, it could take a year or more to turn things around.

Is taking out a personal loan bad for credit?

Taking out a personal loan isn’t inherently bad for your credit. In fact, if you manage it wisely, it could positively impact your credit file over time.

When you first apply for any type of credit, you may experience a small drop in your scores due to the hard credit inquiry. However, this effect is only temporary. Ultimately, repayment behavior has the largest influence over scores. If you take out a personal loan and make regular, on-time payments, it could have a favorable impact your credit profile. Late or missed payments, on the other hand, can have a negative impact.

The key factor is how you manage repayment of the loan.

Which types of personal loans typically help build credit?

Any personal loan that reports to the major credit bureaus — Equifax®, Experian®, and TransUnion® — can help build credit. This includes traditional unsecured personal loans from banks, credit unions, or reputable online lenders.

If you’re starting with little to no credit history, you might look into a credit-builder loan. With this type of personal loan, you don’t receive funds up front. Instead, the lender puts your monthly payments into a savings account. When all payments are made, you can access the account. The lender will report your payment activity to one or multiple credit bureaus, which can help you build a healthy credit history.

How can I avoid hurting my credit with a personal loan?

To avoid damaging your credit with a personal loan, only borrow what you can afford to repay and be sure to pay on time every month (payment history is the biggest factor in your credit scores). Also try to avoid applying for multiple loans and credit cards in a short period of time, as it can lead to several hard inquiries.

When managed responsibly, a personal loan can actually have a positive impact on your credit profile over time.

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

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Every consumer has multiple credit scores. Why is that? Because the major credit bureaus — Experian, Equifax, and TransUnion — may have slightly different credit information on any one person, and credit scoring models vary.

Credit scores are an important financial metric to keep track of throughout the year. The three-digit number can help people qualify for everything from mortgages to student loans and apartment rentals.

Here’s why credit scores vary and how to keep track of each.

What Is a Credit Score?

A credit score is a three-digit number assigned to each consumer that businesses use to measure the risk of lending to that person. It’s not the only thing lenders consider, but it is one of the most important metrics, if not the most important.

Your credit score is based on a bunch of factors, including if you typically pay your bills on time, what your debt is relative to your income, how long you’ve carried credit, how many loans or lines of credit you have at once, and if you have ever had a negative financial event, including bankruptcy.

Credit Scoring Models Vary

Though there are a number of credit scoring models out there, the majority of lenders use either FICO® or VantageScore®. Both determine a person’s credit score using the factors above, including history of borrowing, repayment history, and how much of the consumer’s credit they are currently using (known as a utilization rate).

Though both use the same factors, each one uses its own formula to weigh the worth of each factor. For example, a person’s credit history may be more important in one model than the other.

Based on the information gathered, the scoring models assign each consumer a three-digit number, which denotes that person’s lending risk compared to others.

To complicate matters, there are often multiple versions of each scoring model available from its developer at any given time. And adoption rates for updated versions can be low, meaning some lenders may be using older models that calculate a person’s score differently than an updated version. But for now, the FICO scoring model breaks down as follows:

•   Payment history: 35%

•   Amounts owed: 30%

•   Length of credit history: 15%

•   Credit mix: 10%

•   New credit: 10%

Recommended: What Is Considered a Bad Credit Score?

Scoring Ranges Vary, Too

Both FICO and VantageScore calculate credit scores in a range between 300 to 850.

VantageScore 3.0 and FICO 8 are the most used scoring models and frequently mirror each other, so if your FICO number is high then your VantageScore will likely be high as well.

However, it’s important to note that the two pull the same data but weigh that individual data differently, putting greater importance on some aspects of a person’s credit history and usage than others.

While all creditors and lenders have their own standards, here are the FICO and VantageScore credit score categories:

FICO:

•   Exceptional: 800 to 850

•   Very good: 740 to 799

•   Good: 670 to 739

•   Fair: 580 to 669

•   Very poor: 300 to 579

VantageScore:

•   Excellent: 781 to 850

•   Good: 661 to 780

•   Fair: 601 to 660

•   Poor: 500 to 600

•   Very poor: 300 to 499

To put it all into perspective, in 2024, the average FICO credit score hit 715. Minnesotans reigned supreme with an average of 742.

Report Data Can Differ From Bureau to Bureau

Each of the credit bureaus collects its own data independently, and some lenders may only report data to one or two of the credit bureaus rather than all three.

To add to the complexity, the bureaus usually do not share information with one another, so none can really promise to show a consumer’s total financial picture.

Say Joanna goes into collection for her car loan, but the lender only reports this information to Experian. That means it will likely only appear on and affect her Experian credit report and may not affect her TransUnion or Equifax report. Thus her Experian report could be lower than her other two credit reports.

Scores Can Change Depending on the Lender

Lenders typically build their own relationships over time with at least one of the credit bureaus. This means they may only report information to the credit agencies they have relationships with.

Before applying for a line of credit, a car, home, or student loan, or any other credit, it may be prudent to ask the lender which agencies they share information with and check in with those to see where you stand.

How Often Should You Check Your Credit?

Here’s the good news: Checking your credit won’t hurt your credit score, so go ahead and keep an eye on it. The bad news? The number a person sees when checking their score for free likely won’t match the one any lenders do.

The report a consumer has access to is a simple free report, lacking detail. But again, that’s okay, because it will show any errors or possible identity theft, which can be corrected if caught early enough.

Anyone can order a copy of their credit report from all three reporting agencies once a week at no cost at AnnualCreditReport.com. The report breaks down a person’s credit history but does not give a score.

However, again, this is the time to look for any mistakes and amend them ASAP. Consumers who do see an error can dispute it with the credit reporting agency and the company that holds the account.

It’s also a good idea for people to periodically check their credit to ensure it’s on the up and up.

Those interested in improving their credit scores to potentially get a better rate on loans should pay all their bills on time, limit their credit utilization ratio, and pay down existing debt.

Know what’s cooler than keeping track of your credit score? Keeping track of your credit score and finances at once. If you’re on the market for a money tracker tool that will let you do both, SoFi may be just the thing.

The Takeaway

An individual’s credit scores differ for a variety of reasons. It might be a good idea to ask lenders which agencies they share information with. It’s always a good idea to periodically check your credit report to make sure everything is accurate, to pay bills on time, and to keep credit utilization low.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

*Terms and conditions apply. This offer is only available to new SoFi users without existing SoFi accounts. It is non-transferable. One offer per person. To receive the rewards points offer, you must successfully complete setting up Credit Score Monitoring. Rewards points may only be redeemed towards active SoFi accounts, such as your SoFi Checking or Savings account, subject to program terms that may be found here: SoFi Member Rewards Terms and Conditions. SoFi reserves the right to modify or discontinue this offer at any time without notice.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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