This indicator determines the loan services you can use and the amount of interest you pay. FICO and VantageScore both use a scale of 300 to 850. How many points do you need to qualify for this popular form of credit?
Personal loans and scores
These loans do not require collateral. Usually the funds can be used at the borrower’s discretion. Common goals include covering medical bills, consolidating other debts, and funding special events. The typical range is between $ 1,000 and $ 10,000. Each lender has their own vision of an acceptable score.
If your total is too low, your application will be rejected or interest will be high. Lenders interpret bad scores as an inability to meet their financial obligations. This impression is not always correct, because the calculation can be distorted.
On average, one in five Americans has poor status because of errors in their official reports. The best credit repair agencies of 2022 are part of a big industry. They help consumers improve their scores through litigation. Each year, millions of US citizens use these services.
First of all, check your score for free. You can do this on My FICO or apps like Credit Sesame. Then collect the reports and check them. If there are any mistakes, a good credit repair company will fix them for you. This will give your score an instant boost.
How many points do I need?
Requirements vary. The Experian agency recommends staying in the 670-739 range for best results. The higher the better, but lenders do not price products for the best category (“excellent”). This means that 800 points unlock the best possible conditions. According to other sources, the minimum requirement is between 610 and 640.
Benefits of a high score
All lenders check metrics to assess applicants. Your total is a universal barometer of reliability. It is based on loan records stored by Experian, Equifax, and TransUnion. Both assessments (FICO and VantageScore) take into account your past payments, revolving credit usage, total amount owed, and other factors.
When the score is high, more institutions are ready to accept you, and they offer more attractive terms (interest and fees). All in all, borrowing is cheaper for those with favorable status. They have a wider range of options.
Why lend to someone who doesn’t pay off their debts? These applicants, if accepted, are charged more to offset the risk of default. The position of financial institutions is understandable. Now let’s dissect the factors affecting your score.
Factor 1. Previous payments
The way you’ve handled debt in the past affects the largest share of FICO and VantageScore – 35% and 40%, respectively. Positive status requires making payments on time under the loan agreement. Even a single missed payment can lead to a drop in score.
Factor 2. Limits vs balances
Your credit cards set your usage rate. It shows how much of your available credit is being used. The higher it is, the less attractive you are to new lenders. To find the ratio, divide your total balances by the total limits.
Suppose four cards give you access to $ 10,000. An outstanding balance of $ 4,000 means you are using 40% of the funds. This is more than what experts recommend. Some sources suggest that the best results start at 10% and lower. This factor determines one third of your FICO score.
Factor 3. Age of your records
The more experience you have as a borrower, the better the score. As long as you make all payments on time and avoid overuse, duration is in your favor. The valuation models take into account the oldest and most recent accounts and their average age. This affects 15% of the FICO assessment.
Factor 4. Credit mix
Consumers with excellent scores generally have experience with various forms of borrowing. For example, your history might include student loans, car loans, mortgages, credit cards, etc. This factor defines 10% of your total.
Factor 5. New accounts
The remaining 10% depends on recently opened accounts and the number of serious inquiries. These are special entries on your report. They appear whenever a financial institution checks the records. Too many new accounts and apps are hurting your score.
Other possible factors
The score is important, but it is not the only requirement. Your income and employment status can also affect your eligibility. The institution may require the latest pay stubs, your income tax return, or other documents proving your creditworthiness.
Savings and other sources of income are also taken into account. Personal loans are given to applicants who receive investment income, a pension or a disability award.
Prevention is better than cure
Before you apply for a loan, check your score and your borrowing history. Go to www.annualcreditreport.com to download information from the three rating agencies: Equifax, Experian and TransUnion. This is crucial, as the bureaus compile reports independently. They don’t share information and lenders can liaise with one of the agencies.
Experian recommends doing this well in advance – between 6 months and a year before you apply. Raising the score is doable, but it takes time. Going from “average” to “good” is easier than going from “poor” to “very good”.
Should we opt for more accessible loans?
Consumers who do not obtain personal loans can turn to other, more accessible forms of loan. For example, payday lenders are notorious for accepting applicants with poor track records. The main drawback is the cost.
These loans have outrageous APRs – hundreds of percent a year! This is a short term solution until your next payday. In reality, this is not true for all borrowers. Therefore, think twice.
Instead of going for higher rate loans, work on your score. Make your payments on time, work on your credit usage, etc. The tips in our article will help you achieve the necessary result. It won’t happen overnight, but it will help you avoid the vicious cycle of debt.
(Devdiscourse journalists were not involved in the production of this article. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse assumes no responsibility in this regard.)