You’ve found your personal finances are a bit, well, cramped. Maybe you’ve had an emergency like an automobile accident or serious illness or maybe it’s just that your electric range quit working. You know that you could use your credit cards but if you got a personal loan you’d get the money at a much better interest rate. And that’s true. Check your credit card interest rates and you could be paying 15%, 19% or even more. In comparison, you might get a personal, unsecured loan online from Lending Club at 9.4% or CircleBack Lending at 9.1%. Your bank or credit union might have personal loans at this rate or even better – depending on your credit score. And up jumps that old devil – your credit score.
Your credit score might not be the only thing that prospective lenders take into consideration but it will certainly be one of the most important. It will definitely govern your interest rate if you are able to get a loan. This is because that little three-digit number tells prospective lenders how trustworthy you are as a borrower or conversely how risky you are. It also represents a picture of your debts and repayment history.
Your credit score is a sort of snapshot of your credit report, which is a very detailed summary of how you handled credit over the years. You have three credit reports because there are three credit-reporting bureaus – TransUnion, Experian and Equifax.
How your credit score is calculated
Credit scores are based on a scoring system that was pioneered by a company called Fair Isaac Corporation and is now known just as FICO. Scores range from 350 to 800 and as you might guess the higher the number the better. In fact, if you have a high `number you should not only be able to qualify for a lower interest rate but also get a larger loan. A swing of just 50 points could affect your interest rate by several points. For example, one credit union reports that it offers unsecured personal loans at interest rates based on your credit score as follows.
- Customers with 750+ scores receive a 10.99% APR
- 700-749 scores receive a 11.99% APR
- 660-699 scores receive a 12.99% APR
- 620-659 scores receive a 15.99% APR
- If your score is under 620, your rate will be 17.99% APR
As you can see from this list if your credit score were to drop 20 points from 702 680 your loan would cost you a full percentage point more. And if it were to drop below 660, it would cost you 4% more in interest.
Have you seen your credit reports recently?
Potential lenders are likely to consider your employment history and income in determining whether to give you a loan. Your credit report could be a deal breaker so it’s important to get a copy of at least one of your reports and review it carefully before applying for a loan The biggest reason for this is there could be items on your report you’re not aware of that are bringing down your credit rating. This could include unfavorable information from someone who has your same name or maybe you’ve been victimized by identity theft. When you review your report you also want to look for things that might send up a danger alert to potential lenders. This typically includes late payments, instances where you’ve gone 30% over your credit limit, have closed older credit cards or have only one source of credit. If you find too many of these items on your credit report it’s likely that you will be turned down for the loan or will receive a very unfavorable interest rate.
You should also know your credit score. More and more of lenders are routinely including credit scores in their monthly statements. If yours aren’t doing this you can get your score free from websites such as CreditKarma and CreditSesame. You may also be able to get it free from one of the three credit reporting bureaus.
If you find your credit score is less than good, you might need to change your financial habits. Beyond this, it’s important to correct any errors you find on your credit reports as this could quickly boost your score. You might also pay down outstanding debts as this would improve your credit utilization ratio, which makes up 30% of your credit score. Finally, you might set up automatic payments so you will always pay your bills online. Your bank may offer online banking that would make this very simple. If not, it’s likely your creditors offer ways for you to pay your bills automatically.