Credit Score for Personal Loan

When looking for personal loans your credit score becomes one of the most important factors that a lender will take into consideration when determining whether to allow you to borrow.

Higher credit scores make it more likely you will qualify for a loan, as well as lower interest rates. Your credit score helps lenders determine your creditworthiness, how likely you would be to repay a loan, and gauge what kind of risk you might be and whether or not to extend credit to you.

What’s in a Credit Score?

The main factors considered in credit scoring calculations can vary by which credit reporting bureau since each has their own methods, but the most common attributes most commonly shared include;

  • Payment history (35%)
  • Length of your credit history (15%
  • Available credit vs used credit (30%)
  • The types of credit used (10%)
  • New credit (10%)

Your payment history shows a creditor or lender your ability to make payments, and making them on time. This can include credit cards, department store accounts, installment loans, auto loans, student loans, home equity loans, mortgages and finance company accounts. Details can include missed payments, bankruptcies, delinquency and collection information, along with any bankruptcies, foreclosures, wage attachments as well. Your payment history is one of the most important factors for having a good credit score.

The length of your credit history gives lenders and creditors an idea of how long your accounts have been active, which provides a view of responsible borrowing, and lends towards the details being more accurate with a history behind them.

The amount of debt you have, which is the available credit in comparison to the used credit, provides a view of your debt to credit ratio (DTI) which is also called credit utilization rate also helps lenders make decisions. It’s best to keep yours under 30% if thinking that you might apply for personal loans, and keeping it under 10% can prove to be much better.

The types of accounts you have, along with how many, are also factors in determining your credit score for personal loans. Known as your Account Mix or Mix of Credit, even though it isn’t a significant factor in your credit score, it does demonstrate your ability and experience managing a mix of credit.

Credit Score Range

Your credit score is a three digit number from 300 to 850 that helps evaluate a request for credit such as loans or credit card applications. Most have a credit score between 600 to 750, and those with a credit score below 660 are often less likely to qualify for better loan terms.

Those with lower credit scores like 580 to 620 can still find bad credit personal loans but will pay higher interest rates and may have additional terms and/or fees in the loan options available.

The three major credit bureaus that determine your credit score are Equifax, Experian and TransUnion. The credit scoring model among each is unique, and your credit score or rating can vary depending on which you are looking at. There are also other companies like FICO and VantageScore that are used by lenders or creditors in some situations as well.

Credit Score Inquiries

Credit score inquiries fall under two types known as soft and hard. While a soft inquiry does not affect your credit score, the hard inquiry can. When you have too many hard credit inquiries, especially within recent months, often suggests to creditors and lenders that you might be taking on too much debt or having financial difficulties and looking for credit to help. Also, the shorter your credit history the more likely it is that such inquiries might lower your credit score.

A soft inquiry is when you view your own credit report, or when a lender or credit card company checks has a look so they can see whether they might pre approve you for an offer.

A hard inquiry (or ‘hard pull’) of your credit report can affect your credit score. These are triggered when you apply for a personal loan, car loan, student loan or a credit card.

Note that hard inquiries within a 45 day period are usually considered one inquiry by the agencies, which will typically identify that you are rate shopping and group them together. So when rate shopping or comparing loans online, it is best to work within such a time frame which is reasonable for finding a suitable offer, as it can help to protect your credit score as well.

Surprising Things That Affect Your Credit Score

One way that you are able to improve your credit score, if you are so lucky to find any mistakes on your credit report, clearing those up can have an almost instant benefit to your score. These types of reporting errors do happen, so it’s important that you deal with any discrepancies the moment you find them.

Other things that can affect your credit score include unpaid parking tickets, utility bills, child support, medical bills, rent, taxes, requesting a credit limit increase, bank overdrafts, applying for credit cards or loans, closing a credit card account, unpaid child support, insurance and more.

Making you payments on time to maintain a strong credit history is important to your credit score, and using calendar or phone reminders can help. 

If you have a bad credit score and thinking of getting a personal loan of 5,000 or another amount for debt consolidation of multiple credit cards, having a single payment (hopefully at a lower interest rate) also makes things much more manageable as well.