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One of the key factors that personal loan lenders consider when reviewing your personal loan application is your credit score.
Your credit score is a figure that tells lenders how well you’ve managed debt in the past and how much of a risk you pose to them. The FICO score model — the most commonly used credit scoring algorithm — ranges from 300 to 850, with scores on the higher end considered “exceptional” and scores on the lower end considered “poor.”
While no “right” or minimum credit score will guarantee personal loan approval, your credit score can certainly sway your lender one way or the other and determine the terms, annual percentage rate (APR), and loan offers you qualify for.
What is the minimum credit score for a personal loan?
It’s possible to qualify for a personal loan with a credit score on the lower end of the scoring range, meaning a score of at least 580. But to qualify for the best personal loan rates and terms, you’ll want your score to fall within the “good” to “exceptional” range. A score above 670 is generally considered good.
Lenders view a higher score as a sign that you’re more likely to repay your debt on time and in full.
With a 670-850 score, you’ll be in the best position for approval and your lender may be inclined to offer you a better interest rate because you have a proven track record of positive credit habits.
How your credit score impacts your personal loan application
When you apply for a personal loan, your lender will run what’s known as a hard credit check, obtaining your credit report from one or more of the credit bureaus, and conduct a thorough review of your overall personal finances. This includes your income, credit history, and current debt situation such as credit card balances or other installment loans.
Because personal loans are unsecured loans, meaning there’s no collateral on the line, your creditworthiness matters a lot.
Lenders like banks and credit unions are looking for a borrower who can prove that they have the means to cover the monthly loan payments and has a track record of managing debt in the past.
Your credit score is typically one of the first and most important factors that they weigh because it gives them an in-depth look at your financial history.
There are a few different factors that go into calculating your credit score:
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Payment history (35%): This includes your credit habits, history of on-time payments, and any late payments in your past.
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Credit utilization (30%): Your credit utilization ratio is the amount of credit you have available compared to your debt balances.
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Length of credit history (15%): Some lenders deem new-to-credit consumers as higher-risk candidates for personal loans. Keeping your older credit accounts open and in good standing will help you maintain a longer credit history and will bode well during the personal loan application process.
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New credit (10%): Back-to-back credit applications could ding your score and make your lender think twice about offering you a personal loan. You should aim to be selective about when you apply for any kind of new debt to avoid hurting your credit score or your chances of qualifying for a new loan in the future.
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Credit mix (10%): Showing a lender that you can handle various types of credit and debt shows them that you are capable of keeping your personal finances in order and can be trusted with a new loan or line of credit.
Good credit scores can help you score better personal loan terms
Having a lower credit score or a higher credit score won’t necessarily lead to an immediate approval or rejection. Your lender may still approve your loan application if you have a lower credit score, but it could come with more strings attached.
Your lender may justify the risk they assume in approving your loan by charging additional fees or saddling you with a higher interest rate.
The reverse is true of borrowers with higher credit scores. When you have a proven record of on-time payments, a lengthy credit history, and a diverse credit mix, a lender may be more inclined to offer you the lowest interest rate or approve a larger loan amount.
Best practices for improving a bad credit score
If you’re worried that you won’t meet the minimum credit score requirement, it may be wise to hit pause on your loan application and work on boosting your score first.
Not only will a higher score improve your chances of approval, but having excellent credit could also help you save on additional fees and secure a lower interest rate on your personal loan.
Poor credit could lead to a rejection or a delay in your loan application if your lender asks you to secure a co-signer.
Here are a few easy ways to bring up a low credit score:
1. Make on-time monthly payments
On-time payments account for 35% of your credit score, so make it a priority to make any monthly debt payments on time and in full each month. A late or missed payment can drag down your credit score and take a while to recover from.
Most credit card and loan providers offer auto-pay as a way for borrowers to ensure that they don’t miss any payments and continue to make progress on their repayment.
2. Keep new loan applications to a minimum
Too many new loan applications in a short period of time could give your lender pause about your intentions for your loan and your ability to repay it. Before you submit any application for a new loan, consider whether you have an actual need for it and how a new loan application will impact your credit score.
If your score still hasn’t recovered from your last loan or credit card application, it could be worth your while to wait until it’s improved before subjecting yourself to another hard inquiry.
3. Work to reduce existing debt
Working diligently to lower your overall debt will not only free up funds in your monthly budget, but also you’ll likely see your credit score start to inch upward. Plus, the less debt you have, the lower your credit utilization ratio, and the more likely you are to qualify for additional loan options in the future.