People apply for personal loans for all sorts of reasons. But if your credit score isn’t up to par you could get denied or receive a loan that has very high-interest rates or at a lower dollar amount than you need. So, before applying it’s important to find out what your credit score actually is.
What are Credit Scores?
It is a three-digit number that lenders use to determine the viability of providing a loan or credit card to a prospective candidate. This gives them an idea of the level of risk associated with providing the loan to the client and if it is financially sound or not. FICO credit scores range from as low as 300 to as high as 850. As you may assume, 850 is the maximum (excellent credit) and 300 is the lowest (poor credit).
As a general rule, if your credit score is 659 or lower you’re unlikely to be approved for a personal loan. FICO is the most widely used credit score by lenders in the United States. Your three-digit number is determined by these differing factors:
New Credit (10%) – how new your credit cards or loans are is something that lenders look at. If you’ve recently opened several different credit card accounts this is likely to hurt your credit.
Variation of Credit (10%) – diversity through various forms of credit cards or loans will increase your credit score. Lenders who see that you have different types of accounts such as mortgages, credit cards, auto loans, personal loans, etc.
Credit History Length (15%) – the earlier you can start building credit the better it will reflect on your credit score. Lenders will look at the length of time you have held credit accounts and loans. The longer you’ve had accounts in good standing the better off that will be for your credit score.
Percentage of Credit Used (30%) – how much of your available credit you’re actually using will also hold weight in regards to your credit score number. It’s a good rule to use 30% or less of your credit. If lenders see you are using a very high percentage of your available credit they may be unwilling to approve your loan for fear that you will stretch yourself too thin and be unable to make payments.
Payment History (35%) – basically how well are you paying your bills on time? Late payments of 30 days or more will negatively impact your credit. Because it’s easy enough to forget to pay your credit card bills with all that people have on their plates these days, it’s a good idea to have a payment schedule for all of your bills. That way you don’t miss a payment and you are always on time. This is the most important aspect regarding your credit score.
What Makes My Credit Score So Important?
Whether you agree with it or not your credit score can determine a lot of outcomes when you’re looking to borrow money (no matter how). Credit scores are always a part of the process of getting approved or denied for a loan. It is an easy metric for lenders to use to determine if you are a good candidate for a loan or not. They can simply look at the number and know immediately if you’ll be likely to get approval or not.
Building and maintaining a high credit score makes financial goals more accessible. If you’re looking to buy a home, rent an apartment or lease a car, your credit score will be the determining factor. Not only will it make you get approved for the loan but it will also mean the loan will have far lower interest rates. This is something you always want. The lower the interest rates the less money you’ll have to pay back for receiving the loan.
Typically if your credit score is above 660 it is considered “good” and you’re likely to be approved for the loan. If your credit score is 800 or above it is considered “exceptional” and it not only means you’ll be approved for the loan but at a lower interest rate as well. If your score is lower than 600 it could complicate the lending process. Either with a denial of the loan or with very high-interest rates.
Ways A Credit Score Effects A Loan
Your credit score can determine a few different factors regarding your loan. The most obvious one will be the interest rate that you receive if you are approved for the loan. If your credit score is good lenders will be more confident the loan will be paid back and therefore they will be willing to provide a lower interest rate as the risk to them is lower. If you’re in need of a personal loan but don’t know your credit score you should find out before you actually apply.
If you have a poor credit score and bad credit history a lender will be unlikely to provide you with a loan. It’s a good idea to start doing all that you can to improve your credit score. There are a few ways that you can do this such as getting a secure credit card designed to build credit or change your apartment utilities from a roommate’s name to yours (and a multitude of other things). A great way to boost your credit score is to get a credit card with a low monthly limit and use it to pay things you’re already paying for monthly, like a cell phone bill. Then immediately pay off the credit at the end of every month. This will build credit pretty quickly.
Keep in mind there are also different types of personal loans and that too can affect what a lender will accept or not. Know your credit score before you apply as a denied loan application can reflect negatively on your credit score and credit history. Do all you can to keep your credit score high and ensure you’ll get approval at a great rate.