One of the things lenders take into consideration when you apply for a personal loan is how responsible you are with your existing credit. If you’ve got a low credit score because of a late credit card payment or another minor misstep, getting approved can be a challenge. Before you start filling out loan applications, you’ll want to cross these four credit to-dos off your list.
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1. Pull Your Credit Reports
When applying for a loan lenders often want to see a copy of your credit report. Your report lists out all the details of your different credit accounts, including your payment history, how much debt you owe and how recently you’ve applied for new credit. If you don’t know what’s in the report before you apply, you’re putting yourself at a serious disadvantage.
Free credit reports are available through annualcreditreport.com and once you’ve gotten yours, there are a few things you’ll want to do. First, it’s a good idea to make sure your account balances are being reported correctly and that all of your accounts are showing up. Next, you’ll want to look for any suspicious activity or accounts you don’t recognize since this could be a sign of identity theft. Finally, you’ll want to check for errors or inaccuracies that may be dragging your score down.
2. Pay Down Your Existing Debts
If you already have debt in the form of credit cards, student loans or a car loan, knocking a few dollars off those balances can improve your odds of getting a personal loan. Aside from looking at how much debt you owe overall, lenders also zero in on how much you owe compared to your total credit line. This is called your credit utilization ratio and the higher this number is, the more damaging it can be to your score.
When you need a personal loan to consolidate debts or finance a purchase, minimizing your existing debt can give your score a boost and make you appear less risky to lenders. It’s best to start with credit cards since they tend to carry more weight when it comes to your credit score calculation.
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3. Avoid Making Multiple New Credit Inquiries
Inquiries for new credit account for 10% of your FICO score. By applying for a loan or a new credit card, your score may drop even if you’re not approved. Opening many lines of credit in a short span of time is one of the worst things you can do when you’re planning on getting a personal loan.
Taking the time to compare the different rates banks or other lenders are offering as well as their individual qualification requirements can help you narrow down the field to the right one. That way, if you apply for a loan and you’re denied, your score doesn’t take as much of a hit.
Related Article: How to Get a Personal Loan
4. Pay Your Bills on Time
While these other steps can go a long way toward helping you score a personal loan, it’s very important that you make on-time payments. Your payment history accounts for 35% of your FICO credit score, so timely payments are vital. If you’ve missed a payment here or there, you may need to wait until the negative mark on your report has had time to fade before trying to secure a personal loan.
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