Credit is becoming increasingly important in society for making purchases and financial decisions. Personal loans, in particular, are an excellent fund source for financial needs that may arise out of the blue. So why does credit score matter so much in a personal loan application? In this article, we’ll be discussing personal loans, why a credit score is essential, and how to improve it. Keep reading!
Why People Consider Personal Loans
Personal loans can be used to pay for almost any significant expense. This includes home improvements, funeral costs, medical bills, debt consolidation, or even unforeseen crises if you don’t already have an emergency fund to meet the cost.
Personal loans, like credit cards, accumulate interest as you pay off the debt. Unlike credit cards, personal loans generally include conditions that allow you to return equal amounts over a few months to a few years. As a result, personal loans are classified as installment loans.
Paying off a credit card debt at a 20.00 percent APR with an 8.00 percent APR personal loan will lower your monthly payments and put more money in your pocket each month, given the monthly payments are paid in full. However, the benefits go well beyond simply saving money on interest or freeing up some spending cash.
If you intend to apply for a personal loan, lenders will inspect your credit score closely before approving your application. How exactly do credit scores impact your ultimate interest rate?
How Credit Score Affects Your Personal Loan Application
Personal loans are unsecured loans, so you don’t need to put up an asset to get approved. If you default on your personal loan installments, your lender has no asset it may liquidate or foreclose to get their money back.
As a result, personal loan lenders can be pretty cautious about who they approve. And they tend to favor candidates with excellent credit scores.
The better your credit score, the more likely your application will be accepted, and you’ll get a reasonable interest rate on a personal loan.
To clarify, it is possible to qualify for a personal loan if your credit score isn’t as good, but you may be saddled with a higher interest rate, making the loan much less affordable.
How to Boost Your Credit Score
The measures you take to improve your credit history depend entirely on your credit situation. However, there are general steps that apply to everyone.
1. Pay Your Bills on Time
Paying your bills on time will result in a better payment track record overall. When determining your credit score, your payment history holds more weight than any other aspect.
2. Try Lowering Your Credit Utilization to 30% or Less
Credit usage is the percentage of your credit limit that you are currently utilizing. It is the second most crucial element in FICO credit score computations, after payment history.
The most straightforward approach to keep your credit usage under control is to pay off your credit card bills in full each month.
3. Establish Your Credit File
Opening credit accounts that report directly to the main credit bureaus is a vital step in building up your credit file.
You can’t establish a credit history if you don’t have credit accounts to your name in the first place. Having at least a few open and active credit accounts can be highly advantageous.
4. Review Your Credit Report
Gain access to your credit report copies from the three main national credit bureaus: Equifax, Experian, and TransUnion. You may do this for free once a year by visiting the AnnualCreditReport.com website. Then go over each report to discover what’s helping or hurting your overall score.
An excellent credit score may make it simpler to obtain approval for a personal loan and secure a cheaper interest rate. Check and improve your credit score before applying for a personal loan so you can get the best rates possible.
If you need a personal loan to address your financial situation, you can count on Mid-Town Finance to provide for your needs. Our loan agency in Nashville, TN, offers fair and straightforward loans that make managing finances easy. No matter your credit history, there’s something on the table for you. Don’t hesitate to get in touch with us today!