What Credit Score Do You Need for a Personal Loan?

Personal loans offer a versatile financial tool, whether you're facing an unexpected medical bill, planning home improvements, or consolidating high-interest debt. But a common question arises: "What credit score is needed for a personal loan?"

Understanding Credit Score Requirements

While lenders have varying criteria, there's no single magic number that guarantees approval. However, a FICO® Score of 670 to 739 is generally considered "good" and may increase your chances of qualification.

Even if your score is below this range, don't worry – options exist. Let's explore how credit scores work and how they influence your personal loan journey.

Why Lenders Check Your Credit Score

Lenders assess your credit score to gauge your financial responsibility and creditworthiness. When you apply for any loan, they gather information to determine your eligibility and the loan's terms (interest rate, amount, etc.).

This evaluation involves reviewing your credit reports from major credit bureaus (Equifax®, Experian™, and TransUnion®). These reports detail your credit history, including account types, borrowing amounts, and payment behavior.

Lenders also consider your credit scores, three-digit numbers derived from your credit reports. These scores reflect your likelihood of repaying debt. FICO® and VantageScore® are the most widely used models, each with distinct calculations.

Tip: Loans without credit checks, such as payday or title loans, often come with high costs. Explore alternative options like RISE, which helps borrowers access funds while building a stronger financial foundation.

Do You Have to Have a Good Credit Score to Get a Loan?

A strong credit history, characterized by on-time payments, low balances, and responsible credit use, typically leads to better credit scores. Lenders perceive these borrowers as less risky and may offer lower interest rates and higher loan amounts.

Conversely, lower credit scores may result in less favorable terms due to a higher perceived risk of missed payments or default. Checking your credit score is the first step to understanding where you stand.

Factors That Shape Your Credit Score

Credit scores are complex, but they're based on five key factors:

1. Payment History:

• This is the cornerstone of your creditworthiness and holds the most weight in determining your score. It includes a record of your on-time payments, late payments, and any accounts sent to collections or charged off.
• A consistent history of on-time payments across all your credit accounts demonstrates responsible financial behavior and significantly boosts your score.
• Even one late payment can negatively impact your credit, and the more recent the delinquency, the more severe the consequences.
• Tip: Set up automatic payments or reminders to ensure you never miss a due date.

2. Amounts Owed:

• This factor focuses on the total amount of debt you have outstanding, including credit cards, loans, and other lines of credit.
• Of particular importance is your credit utilization ratio, which is the percentage of your available credit you're using.
• A lower credit utilization ratio (ideally below 30%) indicates you're not overly reliant on credit and can manage your debt responsibly.
• Tip: Aim to pay down high balances and keep credit card spending in check to improve this factor.

3. Length of Credit History:

• This refers to the amount of time your credit accounts have been open. A longer credit history generally translates to a higher score, as it demonstrates a proven track record of managing credit over time.
• Lenders like to see a mix of older and newer accounts, indicating a history of responsible credit use that continues into the present.
• Tip: While you can't change the past, you may want to avoid closing old credit accounts in good standing, as this could shorten your credit history.

4. Credit Mix:

• This refers to the diversity of your credit accounts. A healthy mix might include credit cards, installment loans (like auto loans or personal loans), and perhaps a mortgage.
• Having a variety of credit types demonstrates your ability to manage different forms of debt responsibly.
• However, this is a less influential factor than payment history and amounts owed, so don't worry if you don't have every type of credit.
• Tip: If you only have credit cards, you may want to consider adding other forms of credit if it makes sense for your financial situation.

5. New Credit:

• This factor focuses on how often you apply for and open new credit accounts. Too many hard inquiries (when a lender checks your credit) in a short period can signal financial stress and lower your score.
• Opening multiple new accounts quickly can also affect your score, especially if you have a limited credit history.
• Tip: Only apply for credit when you truly need it and space out credit applications to minimize the impact on your score.

How to Get a Personal Loan with a Bad Credit Score

“Bad” credit is somewhat subjective, and minimum credit score requirements vary by lender. Regardless, it can be difficult to get a personal loan if your scores are below 700. However, if that applies to you, don’t worry - there are many factors in addition to credit score, and you may still qualify through other personal loan lenders’ programs. Consider the following alternative financial institutions:

• Credit Unions: Credit unions are member-owned, not-for-profit institutions, which may translate to more flexible lending criteria than traditional banks. They may also be more willing to consider factors beyond just your credit score, such as your relationship with the credit union, employment history, or overall financial situation.
• Peer-to-Peer (P2P) Lending Platforms: P2P platforms connect borrowers directly with other individuals, bypassing traditional banks. These platforms often have a wider range of credit score requirements, making them accessible to those with fair or even poor credit. However, interest rates can vary depending on your creditworthiness.
• Online Lenders: Many online lenders specialize in serving borrowers with less-than-perfect credit. They may offer competitive rates and streamlined application processes. Some even specialize in helping people with less than perfect credit. Be sure to research and compare different lenders to find the best fit for your needs.

Alternatives to Personal Loans

Personal loans can be used for all sorts of purchases and expenses, such as buying a car or consolidating credit card debt. But they aren’t your only loan option. If a personal loan isn't the right fit, consider:

Personal Lines of Credit (PLOC): PLOCs are a flexible borrowing option that provides you access to a pre-approved amount of funds, which you can use and repay as needed. Unlike a personal loan, where you receive a lump sum, a PLOC lets you borrow in increments, making it ideal for ongoing expenses or unexpected needs. You only pay interest on the amount you borrow, and interest rates are typically lower than credit cards. However, there may be annual fees or draw fees associated with PLOCs.

Credit Card Cash Advances: If you need cash quickly and have a credit card, a cash advance allows you to withdraw money from your card's available credit. While convenient, cash advances often come with significant drawbacks, including:

1. High Fees: Cash advances usually incur a fee, typically a percentage of the amount withdrawn.
2. Higher Interest Rates: The APR on cash advances is often higher than your card's regular purchase APR.
3. No Grace Period: Interest typically starts accruing immediately, meaning you'll start paying interest from the day you take the cash advance.

Whether you choose one of these alternative routes or stick with a personal loan, it’s important to consider the implications of applying with bad credit. Typically, a lower credit score translates to higher interest rates. Sometimes, it might be better to delay your loan application and improve your scores first.

Improving Your Credit Score Before Applying for a Personal Loan

If you don’t meet the minimum credit score needed for a loan, there are ways you can improve your scores before you apply.

Check Your Credit Reports for Errors

It’s smart to check your credit report for possible errors or inaccuracies regularly. That way, when the time comes to apply for new credit, a mistake won’t keep you from qualifying for the best personal loans with the most accommodating loan terms.

You’re typically entitled to a free copy of your credit report from each of the three major credit bureaus (Equifax, Experian and TransUnion) every 12 months.

Pay Your Bills on Time

If you already have credit cards or other types of debt, make sure you’re covering at least the minimum monthly payments on time, every time. That said, it’s better to pay your entire statement balance when you can, as it’ll help you avoid costly credit card interest.

Timely payments can help you improve your scores, but it’s important to note that it’s not usually a quick fix. However, if you have any past-due accounts, bringing them current could have a positive impact.

Reduce Your Debt

While it’s easier said than done, the most straightforward way to improve your credit is to pay down your existing credit card balances. By reducing your outstanding debt, you’ll lower your credit utilization ratio. There isn’t a universal credit utilization ratio that guarantees a good score, but it’s generally recommended to keep your rate below 30%.

Limit New Credit Applications

While you’re working on improving low credit scores, it’s best to avoid applying for new loans — regardless of type. Even if you ultimately don’t agree to the terms of your loan offers, your scores would likely take a slight hit due to hard credit inquiries.

Besides your credit scores, lenders often evaluate your debt-to-income ratio (DTI) too, which measures your monthly loan payments against your gross monthly income. This metric essentially tells a lender if you can afford more debt. So, if you take out credit cards or other loans, you could raise your DTI and make it harder to get approved for a personal loan.

Remember, building good credit takes time and consistent effort. It won't happen overnight, but every step you take gets you closer to your financial goals.

Next Steps Toward a Personal Loan

Depending on your credit standing, taking a few proactive measures before applying for a personal loan can be beneficial. Reviewing your credit report for errors and formulating a debt reduction plan are prudent steps for anyone, regardless of their current credit score.

Fortunately, many resources are available to support you on your journey to securing a personal loan. Consider:

• Credit Counseling: Certified credit counselors can offer personalized advice on improving your creditworthiness.
• Financial Advisors: These professionals can help you create a comprehensive financial plan that includes debt management strategies.
• Trusted Friends and Family: Sometimes, getting a second opinion from someone you trust can offer valuable insights.

If you need funds urgently and have a less-than-perfect credit history, explore lenders like RISE Credit, who specialize in serving borrowers with diverse credit profiles.

RISECredit.com offers online loans to borrowers with less than perfect credit.  Whether you need to cover an unexpected expense or make a necessary purchase, RISEcredit.com can help you get the money you need as soon as tomorrow* through our quick and easy online application.  If you need money visit RISEcredit.com and take the first step towards a brighter future!

_{The content provided is for educational and informational purposes only and does not constitute financial or legal advice. RISE is not acting as a credit counseling or repair service, debt consolidation service, or credit services organization in providing this content. RISE makes no representation about the reliability or suitability of the information provided – any action you take based on this content is at your own risk.}