The short answer is yes. It will impact your credit score indirectly.
Although the loan itself is not reported to credit bureaus, if you default on the loan and fail to repay the outstanding balance, your employer may report the loan as a distribution to the Internal Revenue Service (IRS). If the IRS issues a Form 1099-R for the unpaid balance, it could potentially show up on your credit report if the debt is transferred to a collection agency.
When a collection agency becomes involved, they may report the defaulted loan as a delinquent account, which can significantly impact your credit score. A delinquency notation can stay on your credit report for up to seven years, making it harder to obtain credit in the future, secure favorable interest rates, or even affect your ability to rent an apartment or obtain insurance.
It’s important to note that not all employers report 401(k) loan defaults to the IRS or involve collection agencies. However, it’s a possibility to consider, and it highlights the potential impact on your creditworthiness.
In addition to the credit score impact, one should also consider other consequences of defaulting on a 401(k) loan. In a word, you should not treat this lightly.