There is not one single credit score for personal loan approval. Credit grades or tiers are not “official” and each personal loan provider can make its own rules.
However, some things are universally true:
- The higher your credit score, the more products are available to you
- The higher your score, the better your rate and terms may be
- Applicants with lower credit scores need good income to qualify for loans
- You may move from a lower to a higher bucket by increasing your score by one point if you are at the top of your tier
Some lenders offer low credit score loans, while others only want the most-qualified candidates. Shop with multiple lenders to see your best options, or use a personal loan matching service, such as AmOne to find a loan that makes the most sense for your situation.
Credit score groups or ranges
There are broad general groupings for credit scores. Experian groups scores on a scale of 300 to 850:
Other credit issuers may have different scales. In fact, some sites, including peer-to-peer lenders, have as many as 30 categories! There are no “official” credit groupings.
Letter grades for credit scores
You may notice references to letter grades for credit scores such as “A,” “B,” “C,” etc. For instance, a score between 800 and 850 might be an “A,” a “B” might represent scores between 740 and 799 and so on.
Letter grades — like groupings — are somewhat arbitrary. Different lenders may have different groupings, those in the top groups will likely pay the lowest interest rates while those in the bottom groups may pay higher rates – if they can get financing at all.
Letter scores are similar but what really counts is your score. Fair Isaac, for its part, does not assign letter grades to credit scores.
Credit reports and personal loans
If you’re concerned about the minimum credit score for personal loan approval, you should also be concerned about your credit report and score. Some elements that drop your score just a few points can put you out of the running.
The good news, however, is that raising your credit score just a few points can get you approved for a personal loan. It may also put you into a more desirable tier and make you eligible for a better personal loan interest rate.
Before applying, get your free credit report from the US government at www.annualcreditreport.com. For a small fee, you can also purchase your scores there. If there are items that are incorrect, you may be able to correct them and raise your score.
Example of errors that could lower your score are reporting balances too high, late payments that were made on time, and showing accounts with balances when they were closed and paid off. Correct errors that are dropping your score.
Credit score components: improve personal loan qualification
What should we look at to establish a credit score? Credit score pioneer Fair Isaac lists five core components to its FICO-brand scoring system.
- Utilization, or amount owed: (30 percent) — Let’s say your various lines of credit allow you to borrow $10,000. If you borrow $9,900, that indicates a lot of credit usage. If you have only $1,000 outstanding, that’s much better for scoring purposes
- Payment history: (35 percent) — Looking back, do you make full and timely payments for such things as credit card bills and auto loans? A good payment history can help your credit score
- Credit type: (10 percent) — Credit scoring systems like to see a good credit mix, some revolving debt as well as some installment accounts with regular monthly payments
- Longevity: (15 percent) — The longer an account has been open, the better for credit scoring purposes.
- New credit: (10 percent) — It’s okay to open new credit accounts from time to time. But, if you have recently applied for a lot of new credit, that can be a credit scoring turn off. The worry is that a lot of credit inquiries and new accounts mean your finances might be weakening
If you can improve in just one area, by paying down debt, eliminating inaccurate data or paying promptly for a couple of months, you may be able to boost yourself into a higher credit grade. In fact, replacing credit card debt with a personal installment loan can reduce your utilization and improve your credit score fairly quickly.