If you have a credit card, pay bills, or have taken out a loan in the past, you may want to check your credit score before applying for any loans in the future. This is because your credit score holds more weight than you may realize when it comes to successfully obtaining a loan.
Credit scores are used by lenders to determine whether it’s a risk for them to lend you money or not. A bad credit score can reduce your chances of getting a loan, so it’s important to check your credit score long before making any major financial decisions.
How your credit score impacts your loan application
Whenever you apply for credit with a financial institution, a check will be run to determine your credit score. Your credit score is calculated based on an analysis of your credit history and whether you’ve been reliable and prompt in paying off bills on time.
For those who have a history of missed payments or failure to pay bills on time, you run the risk of lowering your credit score. A low credit score will show lenders that you may be a financial liability, which will affect your ability to obtain a loan.
Importance of checking your credit score long before applying for a loan
Your credit score will be the deciding factor in your lender’s decision to grant or decline your request for a loan. This is why it’s so important to regularly check and monitor your credit score, especially long before you decide to apply for a loan.
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Startlingly, many people think that having a credit score is important for borrowing money in the future. The truth of the matter is, lenders will always favor those with good credit scores since good scores show them your capacity to repay a credit card or loan.
If your credit report shows a history of missed or failed payments, you’ll be at a higher risk of getting knocked back or attracting extra interest charges. This means you need to check your credit score long before applying for a loan to ensure you have time to improve it if it’s poor.
When you apply for a loan, lenders will look at the following factors before making their decision:
- The type of credit products you’ve held in the past two years
- Your usual repayment amount
- How often you make repayments and if they’re done by the due date
- Your personal details (for example, age and where you live)
- The type of credit providers you have used (for example, bank or utility company)
- The amount of credit you have borrowed
- The number of credit applications and inquiries you have made
- Any unpaid or overdue loans or credit
- Any debt agreements or personal insolvency agreements relating to bankruptcy.
Credit scores between 0 and 459 are considered to be weak or below average. If you have a low credit score, then your job should be to improve it before you even think about applying for a loan.
How to improve your credit score before applying for a loan
Reaching and maintaining a good credit score is your best chance of successfully applying for loans in the future. A good credit score will ensure you can obtain the loan needed for that dream house or car.
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.
For small loans or credit cards, a good credit score can result in better interest rates and deals on new credit cards. A good credit score can even help you secure lower payments on homeowners, health, and life insurance. So, how can you improve your credit score if it’s below average?
- Know your credit score. If you haven’t already, check your credit score to know where improvements should be made.
- Pay your bills on time. Before you panic, paying a bill one or two weeks late likely won’t show up as bad credit. If it’s an overdue payment in excess of $150 that has been overdue for 60 days, then it will appear as a black mark on your credit report. The simple solution? Pay your bills as promptly as possible.
- Pay off debts. Reducing some of your debts to zero is a good way of demonstrating that you’re taking responsibility for your finances and can pay off debts completely.
- Don’t apply for credit too often. Each time you apply for credit it will appear on your credit history and may reduce your credit score.
Start improving your credit score for that loan today
Improving your credit score before applying for a loan will greatly increase your chances of having your loan approved. As your financial circumstances improve, your credit rating will also improve, putting you into a good position to increase your likelihood of obtaining finance for that dream home or car. With the advantages you get from having a good credit score, there’s no reason not to begin improving yours today.
If you’re looking for the best personal loans, you’ll definitely want to consult a variety of lenders to get the best rates and terms. See our top picks for the best personal loans of 2020.
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