What credit score is needed for a personal loan? – Councilor Forbes


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Personal loans are among the most versatile and convenient loan products on the market. But like any form of debt that is worth it, the requirements to remove one can be strict. Also, different lenders will have different minimum requirements and different credit scores will give you different loan terms.

For example, we recommend a minimum credit score of 670 to qualify for a personal loan. However, some lenders may require higher credit scores and others that only require a minimum score of 580. The best terms, however, are usually reserved for highly qualified applicants.

We will explain how to increase your chances of qualifying and how to improve your score to benefit from more advantageous loan conditions.

Factors That Affect Your Credit Score

There are several different credit scoring models, but FICO is the most likely model your lender will use, which is made up of the following.

payment history

Payment history represents 35% of your credit score and refers to your monthly debt payment history on time. Because it makes up a large portion of your credit score, a missed payment could lead to a drop of 100 points.
Lenders can only report late payments for 30 days. If it’s only been a few days since the due date, you’re in the clear. The number of days you are late and how long you’ve missed a payment also affects your score. For example, a 30-day late payment is better than a 60-day late payment, a late payment this month affects your score more than one from 2018. Over time, the impact of the delay payment will decrease.

Use of credit

Credit usage is 30% of your credit score and refers to the amount of credit you are using against your overall total credit limit. You should aim for a ratio below 30% but above 0%. Credit bureaus look at both the credit usage for each individual card and the total credit usage among all of your credit cards.
For example, let’s say you have a balance of $ 2,000 on a credit card with a total credit limit of $ 10,000. In this case, your utilization rate is 20%. If you pay $ 1,500, your new ratio would be 5%.

Length of credit history

The average age of your credit is 15% of your credit score. Consumers with older credit histories may have higher credit scores than those with newer accounts. Lenders like a longer credit history because it shows that you can manage credit responsibly.

Credit mix

Revolving credit and installment credit are the two types of credit products. Having both revolving and installment accounts means you have a good credit mix, which is 10% of your credit score.
Revolving credit refers to credit cards because there is no firm repayment date and the user can keep the account open for an unlimited time. An installment loan product is a loan with a fixed term, such as a mortgage, student loan, auto loan or personal loan.

New credit and inquiries

Serious investigation occurs when you apply for a new credit product and a lender checks your credit profile. These requests will stay on your credit report for two years, but will stop affecting your credit score after one year. The number of serious inquiries represents 10% of your credit score.

How to improve your score if it’s too low

If your credit score drops below 660, you may find it difficult to qualify for a personal loan. Here are some easy ways to fix and improve your credit score:

1. Remove errors

According to research by the Federal Trade Commission, one in five people have an error in their credit report, which can lead to a drop in their credit rating.

Visit AnnualCreditReport.com and view the three credit reports from Equifax, Experian and TransUnion. If you notice an error, you can file a dispute directly with the credit bureau.

If you see a negative mark that you recognize, check when it was originally made. Most fall off after seven years, but sometimes the company will report after that time. File a dispute with each credit bureau to resolve this issue.

2. Reduce your credit utilization rate

You can damage your credit score if your credit usage is over 30%. Fortunately, you can quickly improve your score by decreasing usage. The easiest way to do this is to ask for a credit limit increase or to pay off your credit balance.

If you have more than one credit card, focus on the one with the highest percentage of use. Once that ratio is below 30%, start paying extra on the one with the next highest use. Do this until the usage percentages for each credit card are less than 30%.

3. Stop asking for new credit

Since inquiries and average credit age make up 20% of your credit score, you should avoid opening new credit accounts if you want to improve your score.

4. Pay your bills on time

On-time payment history is the most important factor in determining your score, so paying bills on or before the due date can have a significant impact. Set calendar reminders for each credit card or loan due date. You can also usually set up automatic payments through the lender.
If you are setting up automatic payment, make sure you always have enough money in your bank account. If the payment doesn’t go through and you miss the due date, you may end up with a late payment.

Other Factors Affecting Personal Loan Eligibility

Your credit score isn’t the only thing lenders look at. Here are other factors that may affect your application:

Debt-to-income ratio

The debt-to-income ratio (DTI) is the percentage of your monthly debt payments divided by your gross monthly income. Personal loan companies generally like to see an DTI of 36% or less; however, some will allow a DTI ratio of up to 50%.

You can calculate your DTI by adding your minimum monthly loan and credit card payments together. Then divide that number by your monthly gross income, which is your pre-tax income divided by 12.

Returned

Many personal loan companies have a minimum annual income threshold, which varies depending on the lender. For example, Avant has a minimum income of $ 20,000 while SoFi has a minimum of $ 45,000. Before you apply to a lender, review their income requirements to make sure you qualify.

Personal loans for fair or bad credit

Borrowers with a credit score of less than 669 have average or poor credit, which reduces their chances of qualifying for a personal loan. But there are some lenders who cater to these borrowers. Most will charge higher interest rates and offer lower loan amounts than borrowers with good or excellent credit.

Lenders specializing in borrowers with fair credit (580-669) include Upgrade, Wells Fargo, Avant, LightStream, Marcus, and Rocket Loans, to name a few. Borrowers with bad credit (350-579) can apply for a personal loan with Upstart, Lending Club, Wells Fargo, Avant and Upgrade.

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