Personal Loans and Your Credit Score

Personal loans can help cover various expenses. Traditional lenders usually check your credit score and financial history, so a better score gives you more loan options. 

Your credit score not only influences loan approval but also changes based on your repayment behavior. Timely, full payments improve your score, while late or missed payments hurt it, making future loans more difficult to obtain. 

What can a personal loan be used for? 

Personal loans come in various types to suit different needs. Installment Loans and Lines of Credit are good for larger expenses, while Payday Loans are ideal for small, immediate needs. 

These loans can cover a wide range of expenses, including: 

Emergencies 

Personal loans are helpful for unexpected expenses like medical bills, burst pipes, or car repairs, especially when your emergency fund is depleted. 

Debt consolidation 

Personal loans can help you pay off multiple debts at once. Use the loan to settle your outstanding debts, leaving only the personal loan payment. This is especially useful for consolidating high-interest debts like credit cards. 

Keep in mind, however, that you shouldn’t use just any loan to consolidate debt. If your new loan has lower interest rates and better terms than your existing debt, then debt consolidation can be a smart choice. 

Large purchases 

Personal loans are also useful for large expenses. Whether it's for college, a wedding, a new air conditioner, a vacation, or any other big-ticket item, personal loans can provide the funds needed. 

Even if you have enough money in savings, a personal loan can help you avoid depleting your bank account. You can then pay off the purchase in monthly increments instead of a lump sum. 

Why your credit score matters for a personal loan 

Your credit score matters for a personal loan because it’s the main factor most lenders consider. A good credit score suggests you're reliable and likely to repay the loan, making you a safe investment for lenders who then offer better loans with lower interest rates. 

Conversely, a low credit score often indicates financial irresponsibility, such as difficulty repaying debts or taking on too much debt. This makes lenders hesitant to loan you money, fearing you might not repay it. 

What credit score is needed for a personal loan? 

Credit scores range from 300 to 850, with 850 being the best and 300 the worst. 

Poor: less than 580 

A score under 580 usually indicates negative actions on your credit report. Borrowers in this range may struggle to qualify for loans without a co-signer. Loans offered to those with poor scores often have higher interest rates and fees, which can strain your budget. 

If your score is in this range, consider improving your credit before applying for a personal loan to increase your chances of approval. 

Fair: 580-669 

Borrowers with fair credit scores can have an easier time than those with poor credit but still face limitations. They may only be approved for smaller loan amounts at higher interest rates. 

Good: 670 - 739 

This range is where the average American's credit score falls. Borrowers with good credit scores usually get better loan offers and have a higher chance of approval. 

If your score is in this range, research lenders and their rates before deciding, as even a single percentage point difference can mean hundreds of dollars in interest charges. 

Very Good: 740- 799 

Borrowers with very good credit scores typically receive quick loan approvals. They enjoy lower interest rates and higher borrowing amounts. 

Many loan products are available in this range, and you may encounter lenders who wouldn’t consider you before. 

Excellent: 800 or above 

This top-tier credit range offers the best loan options. Borrowers with excellent credit enjoy low-interest loans and higher borrowing amounts. They are the lowest risk for lenders, making them eligible for the best credit card and personal loan offers. 

How to check your credit score 

Because your credit score is crucial to securing a good loan, check it regularly. Your credit card statement often lists your current score. If you don't have a credit card or loan that shows your score, check it at AnnualCreditReport.com or request it from one of the three major credit bureaus: Experian, Equifax, or TransUnion. 

If your score is lower than you'd like, take steps to improve it. A higher credit score means better loan options. 

4 ways to qualify for a better personal loan rate 

1. Improve your credit score 

Fixing your credit score is the best way to qualify for a personal loan with lower interest rates. Here are some practical tips: 

• Review your credit score regularly. 
• Pay off credit card and other debts quickly. 
• Consider a debt consolidation loan to manage multiple debts. 
• Correct any errors on your credit report by contacting the major credit bureaus. 
• Pay your utility, Wi-Fi, phone, and other bills on time. 
• Avoid accepting new credit cards until your score improves. 

2. Pay off your debt 

Paying off your debts is crucial for improving your credit score. Your debt-to-income ratio (DTI) measures how much debt you have compared to your income. A high DTI indicates you have a lot of debt relative to your income, making it harder to pay down debt and less likely for lenders to loan you money. 

Start by paying off your smallest debt and then move on to larger ones. Every bit you pay off helps. As your debt decreases, your credit score will improve, leading to lower interest rates. 

3. Increase your income 

Increasing your income improves your debt-to-income ratio, making you more appealing to lenders. More income also gives you more flexibility to pay down debt. 

If you can't get more hours at work or don't qualify for government benefits, consider picking up a side gig or earning passive income. 

4. Consider a co-signer 

If you can't improve your credit score or need money quickly, having a co-signer can help you secure a personal loan with better rates. A co-signer's income and credit score are considered along with yours, increasing your chances of getting favorable terms if your co-signer has good financial standing. 

How personal loans affect your credit score 

Personal loans can impact your credit score positively or negatively. They can improve your score and financial standing or lower it, making it harder to secure future loans. 

How do personal loans affect your credit score positively? 

Personal loans can boost your credit score if you repay them on time and in full, whether in a lump sum or monthly installments. Timely repayment demonstrates financial responsibility, which can make it easier to borrow money in the future. 

How do personal loans affect a credit score negatively? 

Personal loans can harm your credit score if you fail to make timely payments. Missing payments or defaulting on the loan will significantly decrease your score and creditworthiness. To avoid this, never borrow more than you can repay and consider your income and loan terms to ensure timely, full repayment. 

Apply for a personal loan with Advance America 

Your credit score determines your loan options and costs, and which lenders are willing to work with you. If you're rebuilding your credit or haven't established a credit history, you may still qualify for a personal loan with Advance America. 

Explore our loan options and apply online to receive an instant approval decision.