Since your credit score has a lot to do with what kind of interest rate and terms that lenders might provide, sometimes it can be worth considering to try improving your credit score before you start applying for personal loans.
The amount that can be saved can equal hundreds or thousands of dollars. While the actual amount would depend on how much you want to borrow and of course your credit score, it is very much worth your time to try and improve your credit score or creditworthiness before trying to apply for personal loans to show you are responsible.
In most cases, you will need a credit score of 620 or greater to be approved for personal loans, although there are some lenders that might look at your application with an even lower score, but it comes at a cost and can be expensive. A few lenders might go as low as 600.
The average credit score is about 700, and when your score is around here or greater you will have more choices, along with better interest rates and terms.
Your credit report (and credit score) provides details for lenders and others about your own financial history that can be used for credit and lending decisions. From how you make your payments, whether you make them on-time, your credit mix, debt to credit ratio, age of credit history, amount of debt owed, new lines of credit and more can all be used as factors in determining an individual’s credit score.
There are a few things you can do to improve your credit score, which can be extremely helpful if looking for a personal loan and would like to get the best terms and rates possible.
Pay your bills on time, every time – demonstrating your reliability by maintaining on-time payments for bills and debt goes a long way and gradually helps your credit score.
Pay down debt, keep balances low – another aspect of your credit score is your credit utilization, and keeping this below thirty percent can also benefit you.
Review and report credit score errors – if you review your credit report and see errors or some kind of inaccuracies, they should be reported immediately. This can boost your score and is often one of the easiest ways to improve it, if you should find errors.
If you have bad credit, or even don’t have history and are regarded as ‘credit invisible’ like nearly 35 percent of Canadians , you can improve your situation and the options available to you.
With a little research, you may find that making utility and cell phone payments on-time (even rent) can help contribute to your credit score if you are signed up with the right programs.
While if your credit score is too low and you do not qualify for acceptable personal loan interest rates or terms, it doesn’t mean you are stuck. While it might take a little time, depending on your own situation, there are a few things you can easily do to help improve your credit score.
If you have been doing your homework, you may have come across the term debt-to-income ratio (DTI) and thought this can be part of your credit score. Your DTI does not have a direct role, but rather an indirect one. Since the DTI ratio is about what percentage of total available credit an individual might be using month-to-month. Some lenders will consider credit risk by looking at an applicant’s credit utilization as an indicator of creditworthiness, but the DTI ratio is not part of your credit score.
There are 3 main types of credit available:
Revolving Credit – this is a line of credit which you can freely borrow from that comes with a cap or maximum amount available. This usually refers to credit cards, along with home equity lines of credit (HELOCs).
Installment Credit – this is a type of loan with a set amount and fixed, regularly scheduled payment plan or schedule. This can refer to a variety of loan types including personal loans, auto loans, home loans and student loans.
Open Credit – This type of account has a fixed balance that is to be paid in full each month. Examples of this include utilities accounts and cell phone contracts. As opposed to revolving accounts or installment accounts, the Open Credit account usually doesn’t charge interest, and therefore it isn’t always present on your credit report.
For people with bad credit that are unable to get a personal loan, alternatives like installment loans are sometimes an option, or using a secured loan. With a secured loan you run the risk of losing your home or car or whatever you have put up for collateral to get approved.
Another option when trying to apply for a personal loan can be to find a co-signer willing to help you to improve your odds of being approved. If all else fails, you might have to face that you need to take care of your debt, manage money better, and build up your credit score to qualify.