If you want to take out a personal loan, it's important to have a credit score that will qualify you for the best loan terms. Although the minimum credit score needed for a personal loan can vary by lender, the typical range is 580 to 660.
Credit scores are a way for lenders to evaluate a borrower's financial situation and predict if they will make timely payments. They're based on data from the three major credit bureaus. They're also influenced by factors like your debt-to-income ratio, employment history and income.
The credit scoring model isn't perfect, but it's one of the most reliable ways to assess a person's creditworthiness. You can improve your score by making payments on time, avoiding new credit and ensuring that all of your existing credit is paid down.
A credit score can help you secure a better interest rate and more favorable terms on your personal loan, but it isn't the only thing that influences your ability to get approved. A lender also wants to know that you have a stable job and a source of regular income.
There are a few different types of credit scores. Some, such as FICO and VantageScore, are based on a more detailed analysis of your financial behavior, while others focus only on your credit report.
Getting a credit score can be confusing because there are multiple agencies that provide credit scores. The main factor that affects your score is your payment history, but it's also impacted by how long you have had credit and whether you've applied for new credit in the past.
You can boost your credit score by following these tips:
1. Pay off as much debt as possible, especially existing student loans and other high-interest debts. This will lower your total debt load and reduce the amount of credit inquiries on your report.
2. Avoid applying for new credit in a short period of time, as this will raise your debt-to-income ratio and lower your score.
3. Use a credit card with a low limit and pay it off in full every month. This will increase your credit score and reduce your debt-to-income ratio, which helps you get a better loan.
4. Avoid payday loans or other "no credit check" loans that promise cash in a hurry at very high rates (300% or 400% APR). This type of loan can be very risky and may lead to the lender seizing your property if you can't repay it.
5. Apply for a personal loan if you have a good credit score and don't have enough savings to cover an emergency.
A personal loan can be a great way to cover large expenses, but it's a double-edged sword. Your credit score is likely to drop if you default on your loan or miss payments, but it can be a great tool for paying off multiple unsecured debts and saving on interest fees.
Having a credit score that's above 650 is ideal for getting a personal loan, but you can also improve your credit score by paying off debt and maintaining a healthy balance on existing debts. Keeping your debt to income ratio below 30% is also helpful, as it helps you qualify for the best possible interest rates on your personal loan.