Credit Score Tips for Getting a Personal Loan
The terms of your personal loan depend on your credit score. Use the following tips to boost your credit score before applying for a personal loan.
Make payments on time
Making payments on time brings many benefits. By staying current on your loan, you:
- Avoid late fees
- Prevent the possibility of default
- Gradually improve your credit score
- Reduce your principal balance and the resulting accrued interest
- Have peace of mind
Your credit score and financial health depend on payments being made on time. This vital financial habit will benefit you immensely in the long run. Therefore, your bank account’s autopay feature is a great way to help you avoid missing payments.
Improve your debt ratio
Your debt-to-income ratio (DTI) compare your monthly debt payments and your income. For example, if your monthly debt payments are $1,000 and your monthly income is $3,000, your DTI is 33% ($1,000/$3,000). Lenders use this metric to assess borrowers because it indicates your financial ability to repay additional debt.
If your DTI is a barrier to pre-qualifying for loans, here are some ways to reduce it:
- Pay off other debts so your monthly payments aren’t as high.
- Increase your income so you have room for another debt payment.
- Refinance or consolidate other debts to lower your monthly payment.
Reduce the use of credit
Credit usage is a ratio of your total credit to your total debt. In other words, it’s a comparison between how much you could borrow and how much you currently owe. For example, if you have three credit cards with a limit of $5,000 each. The cards confer a total credit limit of $15,000. You currently owe $1,000 on each credit card. Therefore, your credit usage is 20% ($3,000/$15,000).
Maintaining low credit utilization is the main reason to never shut down a source of credit if possible. Plus, keeping lines of credit open improves your credit history. Lenders like to see a long credit history. So even if you don’t plan on using a credit card you got 10 years ago, don’t close it. The account makes it easier to use your credit and shows lenders an accurate picture of your credit history.
Check your credit report
Borrowers can get a free copy of their credit report annually with each of the three major credit bureaus: Experian™, TransUnion® and Equifax®. Checking your credit report can tell you what’s hurting your credit the most. Additionally, errors may appear on your credit report, dragging your score down. The company generating the report containing the error can help you fix it.