While there could be lenders willing to work with your credit score, boosting it will get you even better terms. Personal loans to build credit will especially help if you have a poor or no credit history at all.
We will explore everything you need to know about this loan product and point you to some lenders you could approach. Check this out.
Your credit score is basically your creditworthiness expressed as a number. They’re otherwise called credit ratings or FICO scores. It is typically a number that ranges from 300 to 850. It represents how much a lender risks (or doesn’t) by giving you a loan.
The higher your credit score, the lower the lender risk, and vice versa. 35% of your credit score consists of your payment history. Basically, how you’ve been servicing your loans if any. 30% is all the amounts owed to lenders, this is your total current debt. The length of your credit history takes 15% of your credit score, summarizing down all your credit accounts, both past, and current. Another 10% consists of the types of credit you use while the remaining 10% are inquiries by lenders whenever you apply for a loan.
Like we earlier noted, to calculate your credit score, a formula considering 5 factors including payment history, the number of credit accounts, and the amounts owed, is used.
Lenders use your credit score to decide whether or not to offer you a loan. Credit scores also come in handy in computing the interest rate you’ll be charged. Credit agencies use the FICO score– a measure by the Fair Isaac Corporation – to calculate credit scores.
Lenders categorize credit scores as;
The higher your credit score, the lower the perceived risk by lenders hence dictating the amount you can receive and the interest rates you’ll pay.
For personal loans, strive to hit a credit score of 660 and above. However, having a good credit score only doesn’t guarantee you a personal loan, or lower interest rates.
Instead, lenders lay much emphasis on creditworthiness, which, on top of your credit score, also entails your credit history and income-to-debt ratio. Because your income-to-debt ratio doesn’t include other bills like electricity, gas, and groceries, lenders likely look at your free cash flow – the money left in your bank account after paying for your expenses.
The whole business of lending is a risky one. That’s why lenders are more motivated to offer loans to borrowers with higher credit scores since they’ve proved they can be trusted to repay the loan.
However, those with lower credit scores really can’t prove this if they don’t get a chance with a lender. That’s why most lenders risk by offering them personal loans.
Once offered the loan, borrowers build a good credit profile by repaying on time. This also boosts the borrower’s credit history.
Using the personal loan to consolidate an existing credit card debt will also help a borrower reduce the credit utilization ratio. Hence, boosting your credit score.
If you have other existing loans, such as student loans, mortgages, and credit cards, adding a personal loan will help boost your credit mix. That, in return, will boost your credit score.
Getting a personal loan will also give you a longer credit history. This shows lenders that you’re responsible and can be trusted with an even larger credit. This will boost your credit score over time. If you have no credit profile, this will also help you build one.
Additionally, when applying for a new loan, the lender will run a hard check on your credit profile. This will cost you some points off your credit score. However, a single inquiry for a personal loan won’t cause significant damage. And, you can recover in a short time.
An invested sum in CDs compounds over time. This means that when a CD earns interest rates, it is calculated based on the initial principal and all accumulated interest, or another term for it is interest-on-interest. Compared to bonds, an intrinsically related investment vehicle, CDs may offer you superior returns over time, mostly since a bond’s interest or coupon rate is derived only from the principal.
This is the formula for you to calculate CD rates:
Final Amount = Principal (1+Rate) Term
Using the formula above, your $5,000 investment with a 5% rate would turn into $6,381 after five years. But if you invest the same amount in a bond with an equal rate, it would be $131 short.
CD: $6,381 = $5,000 (1 + 0.05)5
Bond: $6,250 = $5000 + ($5,000 x 0.05 x 5)
Borrowing with a credit score below 500 will prove challenging. Most lenders simply won’t offer you a loan. However, there are other options you can explore. Such include payday loans. They are meant for quick cash to sort out emergency bills. However, they come with very high-interest rates.
Car loans could also work. However, they have high-interest rates and could see you lose your car should you fall out on the repayment.
Instead, borrowers with poor credit scores can approach credit unions. They approve loans even to borrowers with credit scores below 500 and even have better loan terms and interest rates.
Alternatively, you can choose to concentrate on rebuilding your credit profile. Do this by making timely repayment of your loan. Better still, most personal loan lenders will easily approve your loan if you have a co-signer with a stellar credit profile.
You can also use such assets as vehicles, houses, or any valuable property to act as security.
Please note that bad credit isn’t a permanent mark. Even bigger dents on your profile like bankruptcies can be off your credit profile in a couple of years.
Your credit reports are updated frequently. Your current lenders update new information as soon as you make payment or default on the same.
Updates on your credit profile also continue to occur as lenders remove old information such as past loans and credit card accounts.
Free copies of your credit reports are available from the three major credit reporting agencies including;
The reports are available annually at AnnualCreditReport.com. You can also access your credit reports within 60 days after being denied credit, being unemployed, or noting inaccuracy in your report.
Request your credit score frequently, from all the agencies so you can easily flag inconsistencies and inaccuracies. Should you notice any, be sure to file a dispute with the agency within 30 days.
Check your credit scores and credit reports regularly to better understand your credit position. You’ll also know beforehand what lenders will see when they conduct a check on your credit profile.
If used correctly, personal loans can help you boost your credit score. Repaying them on time will keep your repayment history updated hence boosting your credit score. Adding on a personal loan to existing loans will help boost your credit mix, which will positively affect your credit score.
Yes, some lenders may approve your loan if you have a credit score below 500. However, you’ll be charged higher interest rates than people with good credit scores.
A credit score of above 650 will get you a personal loan with most lenders. An excellent credit score will have you hitting higher loan limits and lower interest rates.
35% of your credit score consists of your payment history, 30% amounts owed, 15% length of credit history, 10% new credit, and the remaining 10% consists of your credit mix. Credit agencies use these 5 elements to calculate the FICO credit score that appears in your credit report.
Your credit score is your creditworthiness expressed in numerical figures ranging from 300 to 850.