What is a Credit Score?
Credit scores are three-digit numbers, usually on a scale of 300 to 850, and indicate whether a borrower is likely to make timely payments on their bills. Besides providing lenders with a better glimpse into your creditworthiness, a credit score also allows financial institutions, insurance companies, and other entities to make faster decisions about your applications. FICO is the most widely used credit score by lenders. The Fair Isaac Corporation developed it.
What is Considered a Good Credit Score?
Most lenders view credit scores above 670 as “good,” while official FICO scores between 670 and 739 are considered “good.” Borrowers with higher credit scores are likely to have better rates and greater chances of approval.
FICO scores are categorized into five categories: poor, fair, good, very good, and exceptional. Below is a breakdown of the ranges:
✅ Poor (<580): Below average, and lenders will rate you as a high-risk borrower.
✅ Fair (580–669): Below average, but many lenders will still approve loans with this score.
✅ Good (670–739): Close to or slightly above average and considered a good credit score by most lenders.
✅ Very Good (740–799): Above average and proves to lenders that you are a very dependable borrower.
✅ Exceptional (800+): Well above average, and lenders will view you as an exceptional borrower.
How is Credit Score Calculated?
The following factors are generally considered when calculating credit scores:
✅ Payment history
✅ Amounts of outstanding debt
✅ Length of credit history
✅ A new debt or new credit
✅ Credit mix
Depending on the credit rating agency, the percentages may differ, but here is a breakdown of the weight each factor has according to FICO:
✅ 35% is based on your payment history
✅ 30% is based on your outstanding debts
✅ 15% is based on the length of your credit history
✅ 10% is based on any new debt or new lines of credit opened
✅ 10% is based on credit mix—the number of credit lines that you have opened (including secured credit cards)
Why Does a Good Credit Score Matter?
Most people will be able to save hundreds of thousands of dollars over their lives if they have a good or excellent credit score. A person with an excellent credit score will receive better rates on mortgages, auto loans, and anything involving financing. As a result, individuals with better credit scores are considered lower-risk borrowers, and more banks are competing to gain their business by offering better rates, fees, and perks. Those with poor credit scores, on the other hand, are deemed to be higher-risk borrowers, which results in fewer lenders competing for their business and increasing the use of criminally high loan rates. Further, obtaining rental housing, renting a car, and even obtaining life insurance becomes more difficult if you have a poor credit score.
How Loans Affect Your Credit Score?
Personal loans may have both positive and negative impacts on your credit score. Taking out a personal loan may affect your credit score since you have acquired a new debt. As a result, obtaining additional credit will be more difficult before repaying the new loan.
Credit agencies keep track of new financial activities. When you attempt to obtain a new car loan shortly after getting a personal loan, the lender might reject your new car loan application as you already have too much debt.
In contrast, paying a personal loan off on time will enhance your credit score, demonstrating your ability to manage debt responsibly.
A personal loan has less impact on your credit score than your credit history as a whole. Your credit score will likely be less impacted by a new loan if you have a long history of responsibly managing debt and paying your bills on time.
How Much is Credit Score Required for a Personal Loan?
Despite the importance of your credit score when applying for a personal loan, lenders also consider other factors, such as how much you earn, how much money you have in the bank, and your current employment. Lenders generally view scores above 670 as indicative of creditworthiness. A high credit score increases your likelihood of being approved for a loan and securing more favorable terms, including a lower interest rate.
How to Check Your Credit Score?
Listed below are a few ways to obtain your credit score:
✅ Credit card companies, banks, and loan companies now provide credit scores to their customers. You can view it on your statement or through your online account as a customer.
✅ Get credit scores directly from major credit bureaus or providers, like FICO.
✅ You can conduct an online credit check for free — some sites provide credit scores for free to their users. Others may offer credit scores on a subscription basis.
As well as checking your credit scores, you should periodically review your credit reports to verify their accuracy and completeness. You can obtain your free credit reports every 12 months from the three nationwide credit bureaus.
How to Improve Your Credit Score?
If your credit score is average or below, you should take steps to improve it. Listed below are a few suggestions:
✅ Pay your bills on time
When you make a late or missed payment, your credit score may be adversely affected.
✅ Reduce the amount of credit used.
For example, if you have a $10000 credit limit and a debt of $6500, you have utilized 65% of the available credit. It would be best to use less than 30% of the available credit.
✅ Check your credit report
Each year, you can access your credit report from each of the three credit bureaus free of charge through annualcreditreport.com. When reviewing your credit reports, you can identify errors that may negatively affect your score and correct them.
✅ Consider a secured credit card
You may be able to establish credit history through a secured credit card even if you have a poor credit score. If you want to attain the best results, choose a secured card that reports to all three credit bureaus.
✅ Consolidate your debts.
Consolidating debts through a bank or credit union may be an option if you have several outstanding debts. As a result, you will only have one payment to make, and if you can lower the interest rate on the loan, you will be in a position to pay down your debt more quickly. This can improve your credit utilization ratio and, therefore, your credit score.
Improving your credit score is a worthwhile endeavor, particularly if you wish to obtain a loan to fund a significant purchase, such as a new vehicle. When you begin to take steps to improve your credit score, it may take several weeks or even months to see a significant improvement.
Some of those negative marks may even need to be removed with the assistance of one of the best credit repair companies. Nevertheless, the earlier you begin repairing your credit, the sooner you see the results.
The Bottom Line
The best way to improve your credit score is to make timely payments. In the short term, a personal loan may affect your credit score, but making payments on time will increase your credit score and contribute to the building of your credit. It would help if you remembered that defaulting on a loan or not making a payment will negatively impact your credit score.
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