How the EIDL May Impact Your Credit Score

While the EIDL program offers crucial financial relief, it's important to understand how the loan application and repayment process can influence your personal and business credit scores.

1. Initial Credit Inquiry: When you apply, the Small Business Administration (SBA) typically performs a hard credit check. This inquiry is recorded on your personal credit report and may cause a minor, temporary dip in your score.

2. New Account and Debt Load: Upon approval, the EIDL is added as a new installment loan to your credit profile. This increases your total debt, which can initially lower your score by affecting your overall credit picture.

3. Ongoing Payment Reporting: Your repayment activity is reported to credit bureaus. Consistently making on-time payments demonstrates creditworthiness and can positively influence your score over the life of the loan, building a strong payment history.

4. Impact of Late Payments: Conversely, any late or missed payments will also be reported. Delinquencies can significantly damage your credit score and may remain on your report for years, making future borrowing more difficult.

5. Building Business Credit: As a business loan, the EIDL and its payment history are also reported to commercial credit agencies. Responsible management of the loan helps establish or strengthen your business's credit profile.

How Much Will the EIDL Affect Your Credit Score?

The impact an Economic Injury Disaster Loan (EIDL) has on your credit score depends on several factors. Here are the key points to consider:

• Initial Credit Check. The Small Business Administration (SBA) performs a credit check during the application process. This hard inquiry can cause a minor, temporary dip in your credit score.
• Debt and Credit Mix. An EIDL adds to your total debt, which can affect your credit utilization ratio. However, it can also positively diversify your credit mix, showing you can manage different loan types.
• Payment History. Consistently making on-time payments will help build a positive payment history on your credit report. Conversely, late or missed payments can significantly lower your score and remain for years.

How You Can Avoid the EIDL Affecting Your Credit Score

Understand the Personal Guarantee

For EIDL loans over $200,000, the SBA requires a personal guarantee. This makes you personally liable for the debt if the business defaults. Consequently, any missed payments or defaults on the loan can be reported on your personal credit history, negatively affecting your score.

Separate Business and Personal Finances

If you're a sole proprietor, there's no legal distinction between you and your business. Forming an LLC or corporation creates a separate legal entity, which can help shield your personal credit from business debts like an EIDL, provided you manage finances correctly.

Ways to Improve Your Credit Score

Improving your credit score is crucial for your financial life, and fortunately, there are several proven methods to boost your creditworthiness. With consistent, positive behavior, most people can see meaningful changes within three to six months.

• Establish automatic bill payments. Since payment history is the single most important factor, setting up automatic payments is a simple way to ensure you never miss a due date.
• Reduce your credit utilization ratio. Aim to keep your credit card balances below 30% of your total available credit, as high utilization can negatively impact your score.
• Monitor your credit reports. Regularly check your reports from Experian, TransUnion, and Equifax to identify and dispute any inaccuracies or fraudulent activity.
• Become an authorized user. Being added to an account with a long history of on-time payments and low utilization can help improve your own credit profile.
• Diversify your credit mix. Lenders like to see that you can responsibly manage different types of credit, such as credit cards, installment loans, and mortgages.
• Limit hard inquiries. Avoid applying for too much new credit at once, as each application can trigger a hard inquiry that temporarily lowers your score.

The Bottom Line

An EIDL application requires a credit check, which can temporarily impact your score. Ultimately, your long-term credit standing will depend on your ability to manage and repay the loan responsibly.

Frequently Asked Questions

Does applying for an EIDL affect my credit score?

Yes, the Small Business Administration performs a hard credit check when you apply. This can cause a minor, temporary decrease in your personal credit score.

How does an EIDL show up on my credit report?

An EIDL is listed as a federal installment loan from the SBA on your personal credit report, similar to how a car or student loan appears.

Will late EIDL payments damage my credit?

Absolutely. The SBA reports payment history to credit bureaus. Late payments or defaulting on the loan will negatively impact your personal and business credit scores.