401(k) Loans & Withdrawals: Impact on Credit Score Explained

Close-up of financial spreadsheets

Taking a loan or an early withdrawal from your 401(k) retirement plan has negative implications for your current and future financial condition. You'll pay a tax penalty if you remove funds out early, and taking out a loan means there's less money in the account to generate interest and dividends. However, one benefit to cashing out part of your 401(k) to pay other debts is that doing so won't have an effect on your credit score.

Accounts Not Reported

Employers don't report 401(k) activities to credit bureaus. That's both good news and bad news. Potential lenders can't use that report to see the growing balances in your retirement accounts that could otherwise make you a less risky candidate. However, they also won't notice if you've taken out a loan against the plan and not paid it back. You'll pay the 10 percent early withdrawal penalty and the federal and state taxes that you'll owe on the income, but your credit score will emerge unscathed.