3 reasons to improve your credit score before taking out a personal loan

Your credit score is an important factor when it comes to qualifying for a personal loan. Here’s why it matters and how to increase your score. (Shutterstock)

Your credit score affects your ability to get a loan, how much you can borrow, the interest rates you’re eligible for, and sometimes, even whether you qualify to rent an apartment. 

When you’re applying for a personal loan, having a good credit score can help you get the lowest available interest rates. Here are three reasons why you should improve your credit score before taking out a personal loan.

Credible makes it easy to see your prequalified personal loan rates from various lenders, all in one place.

• You may get a lower interest rate
• Lenders will be more likely to approve you for a loan
• You may be able to borrow more
• What makes up a credit score?
• Ways to improve your credit

1. You may get a lower interest rate

Your credit score is one of the most important factors that determine what interest rate you’re eligible for when you take out a personal loan — or any type of loan. Generally speaking, the better your credit score, the better the interest rate you’ll qualify for because the less risky you are in a lender’s eyes. And the best interest rates are usually reserved for borrowers with excellent credit.

The interest rate you receive on a loan is important for several reasons. First, it affects the amount of your monthly payment. It also determines your long-term costs, and a higher interest rate can cost you thousands of dollars more over the life of your loan than a lower interest rate.

2. Lenders will be more likely to approve you for a loan

Your credit score will also help determine whether you qualify for a personal loan at all. If your score is too low, it may indicate to a lender that you may not be able to make your loan payments. 

Whether you’re applying for a personal loan, a mortgage, an auto loan, or anything else, a lender will usually have a minimum credit score you’ll need to qualify. Some lenders state this minimum score on their websites, while others don’t.

Visit Credible to compare personal loan rates from various lenders, without affecting your credit score.

3. You may be able to borrow more

Another reason your credit score is so important when you’re applying for a personal loan is that it can affect the amount you’re able to borrow. The better your credit score, the more a lender trusts that you’ll repay your loan. In return, they may lend you a higher amount.

Some personal loan lenders offer loans of up to $100,000, but higher loan amounts may be reserved for borrowers with excellent credit. Meanwhile, someone with poor credit may only qualify to borrow a smaller amount.

But just because you qualify for a larger loan doesn’t necessarily mean you should borrow the full amount. It’s important to only borrow what you need so that you aren’t paying additional interest. 

What makes up a credit score?

To increase your credit score to qualify for a personal loan, it’s important to understand what factors affect your score. Your FICO Score (the scoring model lenders use most) is made up of five key categories.

• Payment history (35%) — Your payment history shows whether you’ve made your loan and credit payments in the past. The better your payment history, the better your credit score. On the other hand, a late or missed payment can cause your credit score to decline.
• Credit utilization (30%) — Your credit utilization refers to the percentage of your available credit that you’re using. You can find it by dividing the amount of your revolving credit that you’re using by your total revolving credit limits. Lenders generally prefer your credit utilization to remain below 30%.
• Length of credit history (15%) — This is the average age of your credit accounts, as well as the age of your oldest and newest accounts. It also shows how long it’s been since you used certain accounts.
• Credit mix (10%) — Your credit mix consists of the different types of credit on your accounts, including credit cards, lines of credit, and installment loans. You don’t need to have one of each type of credit, but having more than one type can be helpful for your credit score.
• New credit (10%) — New credit refers to any new accounts you’ve opened. Opening multiple accounts in a short period of time can be a bad sign to lenders as it could indicate that you’re struggling to manage your debt.

Ways to improve your credit

If your credit score isn’t quite where you’d like it to be, you can do several things to boost your score before you apply for a personal loan. Some of these may yield quick results, while others will take a bit longer: 

• Check your credit report. Checking your credit report can give you an idea of where you stand and what might be keeping your score low, including missed payments. If you find errors on your credit report, you can dispute them with the appropriate credit bureau. Having errors removed from your report can boost your score.
• Pay your bills on time. Your payment history is the most important factor that determines your credit score, so it makes sense that simply paying your bills on time, every time, is the best way to boost your score in the long run.
• Pay off revolving debt. Paying off credit cards and other revolving debt can reduce your credit utilization, which can then increase your credit score.
• Increase your credit limits. In addition to reducing your debt to improve your credit utilization, you can also increase your credit limits. You may be able to do this by calling your credit card company or requesting an increase through your online account.
• Avoid applying for new credit. Applying for new credit right before you apply for a personal loan can result in a small hit to your credit score, which can temporarily lower your score by a few points.

If you’re ready to apply for a personal loan, Credible lets you quickly and easily compare personal loan rates to find one that best suits your needs.