If you’re looking to apply for a personal loan, one of the first things you’ll want to do is check your credit score.
Credit scores help determine not only whether you can get a loan but also how much you’ll pay in interest.
Let us explain.
Your credit score is a number that banks and other financial institutions use to gauge the level of risk they assume if they lend you money. FICO credit scores can range from 300 to 850. The higher the number, the lower the perceived risk.
Typically, if you’re applying for a personal loan, you’ll want a credit score of 660 or higher. More on why this is important in a minute.
The dominant credit-scoring model in the U.S. is FICO, which is short for Fair Isaac Corporation. Your score is calculated based on your credit report and takes into account several factors:
Your credit history shows whether you’ve been paying your bills on time. If you are late by 30 days or more, your credit score could take a hit. Forgetting to pay a bill is quite easy, so be sure to mark your calendar with due dates so you never miss a payment.
The amount of credit you use based on your approved credit limit is what’s known as the credit utilization ratio. To keep your credit score high, it’s recommended you use no more than 30% of your total credit allotment. So, if you have a total of $10,000 in available credit, try to keep your credit card balance to $3,000 or less.
Your payment history and credit utilization ratio together make up the bulk of your credit score. But there are other factors you should be aware of too.
When it comes to credit, it’s best to start building it as soon as possible. The longer you have credit, the better your score can be. Be sure to keep old accounts open unless you have a really good reason for closing them.
Diversity in your credit portfolio can help boost your credit score. Lenders like to see that you can manage more than one account. Various types of accounts include car loans, personal loans, mortgages and, of course, credit cards.
Opening several lines of credit at once can indicate greater risk and hurt your credit score, especially if you have a short credit history.
Now that you know what affects your credit score, learn more about how to establish your credit.
Credit can affect a lot of things.
If you’re looking to borrow money — whether it’s a personal loan, credit card or mortgage — your credit score will be a part of the approval process. Financial institutions rely on your credit score to determine your creditworthiness and ability to pay. If your credit score indicates that you are a risk, your application could be rejected.
A good credit score can have a positive effect on your financial life. Not only does it affect your approval for credit cards and loans, but it could also help you get a lower interest rate on what you borrow, be approved for apartments, start a business or, in some cases, get a job.
A credit score of 660 or higher is considered good, while anything above 800 is considered excellent. If your score is in or around this range, your chances of being approved for a loan or credit card are quite good. A score below 660 could be considered bad or poor, and it could restrict your options.
If you have a good credit score or better, you could qualify for a personal loan with a lower interest rate. This is because you are seen as a trustworthy borrower who is likely to pay back what you borrowed. Checking your credit score is as simple as going to one of the three major crediting bureaus (or all three) and getting your free yearly credit report.
If you have a score that’s considered poor, you could be rejected for a personal loan. You probably wouldn’t let an untrustworthy friend borrow your car. Similarly, lenders are unlikely to approve someone with a bad credit history. To boost your credit score, consider applying for a credit card or credit-builder loan and making regular payments. Learn more about ways to build credit.
If you’re approved for a personal loan, your credit score will also help determine the interest rate you’ll pay on the loan. For example, let's say you want to take out a $20,000 loan with a three-year term. Your loan’s interest rate will vary dramatically depending on your credit score. If you have a poor credit score, you may be on the high end of that range, while an excellent score will likely earn you a lower interest rate. A lower interest rate makes a big difference over the term of the loan. For a $20,000 loan with a 7% interest rate and a three-year term, the total interest would come out to $2,231. But with an interest rate of 25% over the same three-year term, you would end up paying $8,627 in interest.
With good credit, you could qualify for a personal loan with a lower interest rate than that on a high-interest credit card. By using a personal loan with a lower interest rate, you could save money on expenses such as renovating your home, financing a wedding or prepping for an upcoming move.
Learn how much you could save over credit cards by using a personal loan with the Marcus Personal Loan Calculator.
If you find that paying down your debt on time is challenging, a personal loan for debt consolidation from Marcus by Goldman Sachs® could help reduce the number of payments you have to make. Not only that, but you could also improve your credit score by making all your payments on time.