What Credit Score Do You Need for a Personal Loan?

Are you thinking of applying for a personal loan to cover an unexpected expense, consolidate your debt, or fund a major purchase? If so, you may be wondering what credit score you need to qualify for a personal loan and get the best terms possible. According to Experian, the average credit score for personal loan borrowers in the US was 681 in the second quarter of 2020. However, this does not mean that you need a credit score of 681 or higher to get a personal loan. In fact, there are many factors that affect your eligibility and terms for a personal loan, and your credit score is only one of them.

A personal loan is an unsecured loan that you can use for any purpose, such as paying off medical bills, home improvement projects, or wedding expenses. Unlike a secured loan, a personal loan does not require any collateral, such as your home or car, to back it up. However, this also means that lenders will rely more on your credit score and other financial information to assess your creditworthiness and ability to repay the loan.

A credit score is a three-digit number that summarizes your credit history and behavior. It ranges from 300 to 850, with higher scores indicating better credit. Your credit score is based on five main factors: payment history, credit utilization, credit history, credit mix, and new credit. Your credit score affects your eligibility and terms for a personal loan, such as the interest rate, fees, loan amount, and repayment term.

In this article, we will explain what factors affect your credit score, what credit score ranges are there and what they mean, how to check your credit score and report before applying for a personal loan, how to find the best personal loan for your credit score, and how to improve your credit score while paying off your personal loan.

What Factors Affect Your Credit Score?

Your credit score is determined by five main factors that reflect your credit history and behavior. Each factor has a different weight in calculating your credit score. Here are the five factors and how to improve each one:

• Payment history (35%): This is the most important factor in your credit score. It shows how well you have paid your bills on time and in full. Late payments, missed payments, defaults, collections, bankruptcies, and other negative marks can lower your credit score significantly. To improve this factor, you should always pay your bills on time and in full every month. If you have any past due accounts, you should contact your creditors and arrange a payment plan or settlement. You should also avoid applying for new credit if you have trouble paying your existing debts.
• Credit utilization (30%): This is the second most important factor in your credit score. It shows how much of your available credit you are using. It is calculated by dividing your total balance by your total credit limit across all your accounts. For example, if you have a balance of $1,000 and a credit limit of $10,000 across all your accounts, your credit utilization ratio is 10%. A lower credit utilization ratio indicates that you are not relying too much on credit and can manage your debt well. To improve this factor, you should pay down your balances as much as possible and keep them low. You should also avoid closing old accounts or opening new ones, as this can reduce your total credit limit and increase your credit utilization ratio.
• Credit history (15%): This is the third most important factor in your credit score. It shows how long you have been using credit and how old your accounts are. It is calculated by averaging the age of all your accounts, including both open and closed ones. A longer credit history indicates that you have more experience and stability with credit. To improve this factor, you should keep your old accounts open and active, as long as they have positive payment history and low balances. You should also avoid opening too many new accounts at once, as this can lower the average age of your accounts and create hard inquiries on your credit report.
• Credit mix (10%): This is the fourth most important factor in your credit score. It shows the variety of credit accounts that you have, such as credit cards, personal loans, auto loans, mortgages, and student loans. A more diverse credit mix indicates that you can handle different types of credit responsibly. To improve this factor, you should maintain a healthy balance of credit accounts, but only if you can afford them and pay them on time. You should also avoid applying for credit accounts that you do not need or want, as this can create hard inquiries on your credit report and increase your debt burden.
• New credit (10%): This is the fifth most important factor in your credit score. It shows how many new credit accounts you have opened or applied for recently. It is measured by the number of hard inquiries on your credit report in the past 12 months. A hard inquiry occurs when a lender checks your credit report to make a lending decision. A few hard inquiries are normal and expected when you apply for credit, but too many hard inquiries can lower your credit score, as it shows that you are seeking too much credit or having difficulty getting approved. To improve this factor, you should limit the number of hard inquiries on your credit report by only applying for credit when you really need it and shopping around for the best rates within a short period of time (usually 14 to 45 days). You should also avoid applying for multiple types of credit at once, as this can make you look desperate or risky.

What Credit Score Ranges Are There and What Do They Mean?

There are different models and scales for calculating credit scores, but one of the most widely used ones is the FICO Score, which ranges from 300 to 850. Here are the different FICO Score ranges and what they mean:

• Excellent (800 to 850): This is the highest range of FICO Scores. It means that you have an exceptional credit history and behavior. You are likely to qualify for any type of loan with the lowest interest rates and fees available. You are also likely to receive preferential treatment from lenders and creditors, such as higher limits, longer grace periods, and rewards programs.
• Good (740 to 799): This is the second highest range of FICO Scores. It means that you have a very good credit history and behavior. You are likely to qualify for most types of loans with competitive interest rates and fees. You are also likely to receive favorable treatment from lenders and creditors, such as moderate limits, reasonable grace periods, and rewards programs.
• Fair (670 to 739): This is the third highest range of FICO Scores. It means that you have a decent credit history and behavior. You are likely to qualify for some types of loans with average interest rates and fees. You may also face some limitations from lenders and creditors, such as lower limits, shorter grace periods, and fewer rewards programs.
• Poor (580 to 669): This is the second lowest range of FICO Scores. It means that you have a below average credit history and behavior. You may have difficulty qualifying for some types of loans or may only qualify for subprime loans with high interest rates and fees. You may also face many restrictions from lenders and creditors, such as very low limits, no grace periods, and no rewards programs.
• Bad (300 to 579): This is the lowest range of FICO Scores. It means that you have a poor or very poor credit history and behavior. You may not qualify for most types of loans or may only qualify for predatory loans with exorbitant interest rates and fees. You may also face severe consequences from lenders and creditors, such as denial of service, collection actions, or legal actions.

How to Check Your Credit Score and Report Before Applying for a Personal Loan?

Before applying for a personal loan, it is important to check your credit score and report to see where you stand and what options you have. Your credit score and report will determine if you qualify for a personal loan and what rates and terms you can get.

You can get a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian, TransUnion) once every 12 months through AnnualCreditReport.com. You can also get a free estimate of your FICO Score from various websites or apps such as Credit Karma or Credit Sesame.

You should review your credit score and report carefully before applying for a personal loan. You should look for any errors or discrepancies that may affect your eligibility or terms for a personal loan. For example,

• Your name, address, or social security number may be incorrect or outdated

• Your account balances or payment history may be inaccurate or incomplete

• Your accounts may be duplicated or mixed up with someone else’s

• Your accounts may be fraudulent or identity theft

If you find any errors or discrepancies on your credit report, you should dispute them with the corresponding credit bureau as soon as possible. You can do this online, by phone, or by mail, depending on the credit bureau’s instructions. You will need to provide proof of the error, such as a copy of your statement, receipt, or letter from the creditor. The credit bureau will then investigate the dispute and correct the error if it is verified. This may take up to 30 days, depending on the complexity of the dispute. You can also contact the creditor directly and ask them to update or remove the inaccurate information from your credit report. However, this may take longer than disputing with the credit bureau, as the creditor may not cooperate or respond in a timely manner.

How to Find the Best Personal Loan for Your Credit Score?

Once you have checked your credit score and report, the next step is to find the best personal loan for your credit score. There are many lenders in the market that offer different rates, fees, terms, and features for their personal loans. To find the best personal loan for your credit score, you need to shop around and compare different offers and find the one that suits your needs and goals. Here are some steps to follow:

• Shop around and compare different lenders and their offers: The first step is to shop around and compare different lenders and their offers based on your credit score and other factors such as interest rates, fees, loan amounts, repayment terms, and eligibility criteria. You can use online tools such as Bankrate or NerdWallet to compare multiple lenders at once and see their reviews and ratings from other customers. You can also check with your local bank or credit union to see if they offer any special deals or discounts for their existing customers. You should compare at least three to five offers before making a decision.

• Check your eligibility criteria: The second step is to check your eligibility criteria for each lender and offer that you are interested in. Eligibility criteria are the minimum requirements that you need to meet to qualify for a personal loan. They may include factors such as:

  • Your credit score
  • Your income
  • Your employment status
  • Your debt-to-income ratio
  • Your citizenship or residency status
  • Your age
  • Your bank account details

You should make sure that you meet all the eligibility criteria before applying for a personal loan, as applying for a loan that you do not qualify for can result in a hard inquiry on your credit report, which can lower your credit score temporarily.

• Use a personal loan calculator: The third step is to use a personal loan calculator to estimate how much you can borrow, how much you will pay each month, how much interest you will pay over time, and how long it will take you to pay off the loan. A personal loan calculator will ask you to enter information such as:

  • The loan amount
  • The interest rate
  • The fees
  • The repayment term
  • The monthly income
  • The monthly expenses

It will then show you how much you can afford to borrow, how much you will pay each month on the loan, how much interest you will pay over time, and how long it will take you to pay off the loan. You can use online calculators such as Bankrate or NerdWallet to estimate your personal loan costs.

• Negotiate with lenders: The fourth step is to negotiate with lenders and get the best deal possible for your personal loan. You can try to negotiate factors such as:

  • The interest rate
  • The fees
  • The loan amount
  • The repayment term
  • The payment options

To negotiate effectively, you should have a good credit score, a stable income, a low debt-to-income ratio, and a clear purpose for the loan. You should also research the market rates and terms for similar loans, compare different offers from different lenders, and be prepared to walk away if you do not get what you want.

How to Improve Your Credit Score While Paying Off Your Personal Loan?

Paying off your personal loan can improve your credit score in several ways, such as reducing your credit utilization ratio, diversifying your credit mix, improving your payment history. However, paying off your personal loan is not enough to maintain or improve your credit score. You also need to follow some tips to keep your credit score in good shape after paying off your personal loan. Here are some tips:

• Avoid new debt: The first tip is to avoid new debt until you pay off your personal loan completely. If you take on new debt while paying off your personal loan, you will increase your debt burden, lower your credit score, and make it harder to repay both debts. If you need to use credit for emergencies or essential purchases, make sure that you pay off the balance in full every month and do not carry any balance over.

• Keep your old accounts open: The second tip is to keep your old accounts open after paying off your personal loan. Closing old accounts can reduce your total credit limit, increase your credit utilization ratio, lower your credit history length, and hurt your credit score. Keeping old accounts open can help maintain or improve these factors and boost your credit score. However, you should only keep old accounts open if they have positive payment history and low balances. If they have negative marks or high balances, you should close them or pay them off as soon as possible.

• Monitor your credit score and report regularly: The third tip is to monitor your credit score and report regularly after paying off your personal loan. You should check your credit score at least once a year from each of the three major credit bureaus through AnnualCreditReport.com. You should also check your credit report at least once a year from each of the three major credit bureaus through AnnualCreditReport.com. You should review both documents carefully for accuracy and dispute any errors or discrepancies that may affect your eligibility or terms for future loans.

Conclusion

Your credit score is one of the most important factors that affect your eligibility and terms for a personal loan. However, it is not the only factor that matters. There are many other factors that affect your eligibility and terms for a personal loan, such as interest rates, fees, loan amounts, repayment terms, eligibility criteria etc. To get the best personal loan for your credit score, you need to check your credit score and report before applying for a personal loan, shop around and compare different lenders and their offers, and negotiate with lenders to get the best deal possible. You also need to pay off your personal loan on time and in full, and follow some tips to maintain or improve your credit score after paying off your personal loan.

If you are interested in applying for a personal loan with a good credit score, you can start by comparing different offers from our trusted partners below. You can also read more articles on our blog to learn more about personal finance and credit management.