Credit Score and Personal Loans

If you’re seeking a personal loan you’ll want to know your credit score. Because if it’s subpar, you may run into difficulties getting that loan.

What’s a Credit Score?

A credit score results from a review and calculation of the following eight factors:

• Bad credit behavior
• Late payment history
• Current debt level
• Non payments
• Credit account types
• Length of credit history
• Number of credit inquiries
• Credit application history

Also know as a FICO (Fair Issac Corporation) score, after the company that created the first credit scoring system in 1958, the scores range from 300 to 900.

• If you score at 720 or above, it’s considered excellent
• People at 650 or to 720 will likely be able to obtain loans at a good interest rate
• At 620 to 650, there may be additional documentation required but you’ll probably be able to get a decent loan
• 620 is the cutoff between prime and subprime loans
• Anything below 550 is considered awful

The Three Credit Bureaus

There are three companies in the business of gathering, maintaining and selling consumer credit history information. They are TransUnion, Experian and Equifax.

These firms collect information about the payment and credit application habits of consumers from retailers, banks, credit unions and other credit grantors.

They store this information in a database. Then, they sell it to credit grantors in the form of credit reports. The credit bureau charges a fee for each report they sell.

Factors in a Personal Loan Decision

Because the three credit bureau firms look at the numbers slightly differently, lenders may look at your scores from all of them. Combined with other data (income to debt ratio, income, debt capacity, your character, etc.) the lending institution’s underwriter will make a decision about whether or not to grant your personal loan.

In fact, your credit score is one of the three C’s—Character, Capacity and Credit—that lenders look at so it’s very important and the higher the better.

It’s very, very difficult to obtain an unsecured personal loan with a poor credit score. You’ll almost certainly need some collateral to obtain a personal loan.

You can also take the time and concentrate on improving your credit score so you can get a loan when you need it.

Review and Repair Your Credit History, if Necessary

You can request a free report each year from the three credit bureaus mentioned above. If you find errors, fix them. If there are no errors but your score is subpar you can fix it by doing the following:

• Apply for a secured personal loan and pay it back promptly
• Borrow only small amounts of money
• Stay away from cash advance stores to avoid getting into more debt
• Pay on time and try to pay off the balance in a few months
• Do not spend the loan. Put the money in a savings account and use it to pay the loan.

Eventually, assuming you’re paying your mortgage, auto loans and other debts on time, you’re score will begin to rise.

Only when your credit reports get back to a satisfactory level will you be able to take advantage of the best rates when you have to take out a personal loan.