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A good credit score unlocks many financial opportunities, especially personal loans secured with preferential interest rates. Should you be planning big transactions, need to consolidate debt, or encounter some unexpected costs, your credit score proves pivotal in how lenders judge your creditworthiness.
If the score is low, the result can be a notorious rate of interest or outright rejection of loan applications. With a high score, you are likely to get the best possible terms.
If you want to apply for a personal loan, then some time will have to be taken to enhance your credit score. This is not overnight magic but rather some strategic actions that can see improvement come about in a matter of months.
Here are several actionable tips to help improve your credit score before you apply for a personal loan:
The first step in managing your credit score better is acquiring a free copy of your credit report from each of the major credit bureaus, namely, TransUnion. Under current law, you are allowed to obtain one free report each from the agencies annually.
Review for inaccuracies, such as misstatements of account information, payment history, or credit balances you are not familiar with. Even a small mistake could sink your score. When you find an error here, dispute it right away with the credit reporting agency to correct it.
Credit history, in which the payment amount is mainly concerned, defines one of the most essential aspects that would determine your credit score. This mainly points out whether you are reliable in paying off the money borrowed and how the lateness in payments or missing payments may affect your credit score severely.
To help improve this area of your credit, start paying your bills on time. If you have had a history of paying late in the past, now create a record of paying on time by posting reminders or even automatic payments for upcoming billing. Each timely payment will help raise your credit score over time.
The last important factor to determine your credit score is credit utilization, or how much of your available credit you use. Ideally, you want to use less than 30% of the total amount of your credit limit. If your balances are very high relative to your credit limits, the creditors may think that you cannot pay for it and thereby lower your score.
To reduce the credit utilization ratio, pay all with credit card balances as much as possible. If that’s not possible, at the minimum, bring the balances below the 30% mark. The lower the utilization, the higher the score will be.
Although this may seem like getting a new credit card or line of credit would help your utilization, applying for new credit is a short-term hurt to your score. Each new credit application generates a “hard inquiry” on your report that will depress your score a little bit.
Another is that acquiring new accounts lowers your average age of credit, yet this is something that creditors are likely to consider when assessing your creditworthiness. If you think you will need a personal loan sometime shortly, it makes sense not to apply for additional credit cards or loans until later.
The second factor is the length of your credit history. The longer you have existing credit, the better it looks on your report. That’s because closing old accounts with long histories can negatively affect your score by shortening the average age of your accounts.
Even if you haven’t used that credit card in ages, it might be wise to leave it open. Old accounts help you build your score over time, provided you pay no annual fees for which you receive no benefits.
The more credit types you can prove to lenders that you manage responsibly, the better. This includes installment loans; for example, auto loans or mortgages, as well as revolving credit such as credit cards. You want your report to show examples of both types.
If you only have one type of credit, mix it up. For example, if you only have credit cards, opening a small loan you can
manage may boost your score if you pay it on time. But don’t take on new debt just to boost your score, if it will hurt your bottom line.
Each time you apply for credit, the lender you are applying to performs a hard inquiry on your credit report. Hard inquiries reduce your credit score in the short term, but they also give lenders the impression that you are desperate for credit and, therefore appear riskier to lend to if they see multiple inquiries within a close time frame.
To minimize this, only draw credit when you need to. So-called soft inquiries, like looking up your credit report, are free of any negative impact on you; check on your credit well-being anytime you want to.
If you have bad credit or just don’t have much of a history, a credit-builder loan can put your score into growth mode in short order. These loans are designed to help someone establish or rebuild credit. You borrow the money, and typically have it deposited into a savings account; you pay off the loan by making monthly payments. Upon the loan paying off, the money is returned to you and then reported to the credit bureaus as part of your payment history where it can improve your score. Credit-builder loans may be accessed from most community banks, credit unions, and even some online lenders.
If you have a family member or a good friend with a decent credit history, ask him or her if they’ll allow you to become an authorized user on their credit card account. As an authorized user, you indirectly benefit from the positive payment history and the long account history of the primary cardholder.
Make sure that the account is positive and current and that the person responsible for keeping the account positive and current continues to make timely payments because any negative activity related to that account will also reflect on yours.
Thus, these tips will help improve your credit score before availing of that personal loan does indeed take time, patience, and some good financial habits. You can correct errors on your credit report and pay bills on time; ensure you cut up those credit cards to lower balances and avoid applying for new credits. A few months from now you could dramatically improve your score, thus increasing the probability that you’ll get a better term of personal loan and can save in the long run.
Remember that good credit scores result from long-term consistent behavior, so start now and make smart decisions that will serve you well for years to come.
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