There may be several times in life when you need to borrow money. From making a large-scale purchase to starting a new business, sometimes additional financing is necessary when the price tag is outside of your current financial means.
However, depending on your credit score, this could be a challenge. Your FICO Score, the most widely used measure of credit rating, is a number between 300 and 850 that qualifies your creditworthiness. Many conventional lenders are very particular about a borrower’s credit score. Even though lending platforms for online loans are often less restrictive, they too can have some minimum standards. If you’re considering borrowing money, here’s what you need to know about the impact that your credit score could have on the process.
How your credit affects your ability to borrow
A low or below-average credit score could affect your loan application in the following ways:
1) Approval
Depending on the loan you apply for, your credit score may determine whether you’ll be approved. But keep in mind that every lender has their own internal requirements for what a minimum score can be. Additionally, if there are other negative marks in your credit history (such as having a past account sent to a collection agency), this may also impact your approval chances.
2) Interest rate
Even if your credit score does meet the minimum requirements for acceptance, it doesn’t necessarily mean that you’ll be offered the best interest rates. Generally, the attractive interest rates you see advertised for many loans are reserved for borrowers with excellent credit scores. If your score is only good, fair, or poor, then the rate you’ll be offered with the loan may be higher.
3) Loan amount
A lower-than-average credit rating may also restrict the amount of money that you wish to borrow. For example, even though you may have the financial means to pay back a loan for $10,000, a low credit score may cause the lender to restrict you to a maximum offering of $5,000.
4) Other loan terms
Every loan has terms that are structured a little bit differently, and your credit score can often make a difference in these details. For instance, even though you may be applying for a loan that lasts 60 months, a low credit score may mean the lender will only approve a term of 24 months or less.
How to improve your FICO score
If you find yourself in a situation where your FICO Score is preventing you from getting the loan you desire, you can take steps to raise it by doing the following:
- Set your bills to auto-pay: This will ensure that all your bills are paid on time and in the correct amount.
- Pay your bills in full: This includes your credit cards, utilities, and any other loans you may have.
- Limit your credit usage: Lenders generally like to see an overall credit utilization of 30% or less.
- Keep old credit cards open: The longer you let your active credit accounts age, the better it is for your FICO Score.
- Don’t apply for any new lines of credit: The fewer hard inquiries against your credit history, the better it is for your score.
The bottom line
Your credit score can be a strong factor in your ability to qualify for a loan. Not only can it determine if you’re approved, but it could also dictate the interest rate, loan amount, and other terms. If you’ve had trouble with credit in the past, then consider taking steps to improve it, such as paying your bills on time and limiting your credit usage.