Being fully prepared with the best chance to get the best interest rates when applying for a loan is essential and will benefit you in the long run. This article will serve as a guide to understanding credit scores, and exactly how they are calculated so that you can better support your credit score growth.
What is a credit score?
Your credit score is a three-digit number that is calculated based on your credit reports. It is an indication of your history with credit and will show lenders how responsible you are with debt. Credit scores can range from 300-579: poor, 580-669: fair, 670-739: good, 740-799: very good and 800-850: excellent. The higher your credit score, the lower risk you are to lenders as opposed to low credit scores with more risk. This then affects the type of deal you are offered on loans and credit in terms of fees and interest rates. Borrowers with a lower credit score have a higher chance of defaulting on their loans due to previous credit interactions, so may receive higher interest rates to offset this risk to lenders.
How is a credit score calculated?
It’s imperative to understand how your credit score is calculated so that you’re able to keep track of your financial decisions. Your credit score is a representation of your information held by credit bureaus and is analyzed by a credit scoring system like the FICO® Score or VantageScore® model. The most common factors taken into consideration for your credit score are:
Your debt payment history
Lenders look at how responsible you are with making your debt repayments on time. One missed payment can negatively impact your score, so be sure to make your payments on time consistently. Set an automatic payment method if necessary.
Amount of credit used or your credit utilisation ratio
Your credit utilization is calculated by dividing the total amount of your credit card balances by the sum of all your card borrowing limits. A ratio of below 30% is preferred, showing that you are not overusing your credit. A higher ratio than 30% will decrease your credit score.
Credit history length
A longer credit history likely results in a higher credit score. Creditors take into account the age of your oldest credit account, your newest account, and the average age of all credit accounts on your name.
Your credit mix
A mix of different types of credit accounts, like instalment loans, mortgages, and credit cards, are good to have as they impact your scores positively. However, avoid opening a lot of new accounts at the same time as this can bring your score down.
What credit score do you need to qualify for a personal loan?
To qualify for personal loans with prime interest rates and loan terms, you will need to ensure your credit score is in good standing along with a few other factors.
Each lender requires different minimum credit scores, but on average the best credit score to have is between 600 - 700. A higher score means you are less of a risk to lenders, and more likely to qualify. A credit score of over 800 is excellent and will have the best competitive interest rates and allow you the freedom of choosing your loan terms.
A longer credit is preferred for a loan application, a minimum of 2-3 is accepted but longer than this is better. Making your debt repayments on time, on multiple accounts over a long period means that you are responsible for payments.
Your debt-to-income ratio is your debt owed against your monthly income. This shows lenders how much you would be able to repay each month towards your debts. Ensure that your income is stable enough to take on another loan before you apply.
How to get a credit report
Before you apply for a loan, assess your credit and financial situation. Your credit report can help understand what you would need to do and how to increase your credit score. South Africans are entitled to one free credit report from any of these credit bureaus; TransUnion, Compuscan, Experian, and XDS (Xpert Decision Systems).
Visit their websites to access your free credit report and assess how you can improve your status if needed.
How to improve your credit score before applying for a loan
- Pay your accounts on time and in full wherever possible. Avoid paying minimum amounts towards your debts.
Only use credit where you need to, without reaching your credit limits. - Keep your credit card debt as low as possible as they have the highest interest rates and will hold you back from keeping your balances low.
- Avoid owing more than 30% of your income on debt.
- Make arrangements with lenders if you find yourself unable to pay back your debts.
Prepare your credit score ahead of time if you plan on taking a personal loan out. Keeping to a payment schedule and not overusing your credit will help you achieve a credit score above 600 to qualify on your application.
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FAQs
Payment history is weighed the most heavily in determining your credit score, along with your total outstanding debt. Generally, borrowers need a credit score of at least 610 to 640 to even qualify for a personal loan. To qualify for a lender's lowest interest rate, borrowers typically need a score of at least 800.
What credit score is good enough for a loan? ›
Many give preference to borrowers with good or excellent credit scores (690 and above), but some lenders accept borrowers with bad credit (a score below 630). The typical minimum credit score to qualify for a personal loan is 560 to 660, according to lenders surveyed by NerdWallet.
What is the credit score required for a loan? ›
No lender specifies a minimum CIBIL score requirement for a personal loan application. However, a score of 750 and above is preferred by lenders for loan applications. This score reflects the creditworthiness of the borrower and the chances of lenders approving the loan application with this score increases.
What does your credit score need to be to take out a loan? ›
The minimum credit score needed for a personal loan is typically 580, though the best loan terms are usually reserved for people with a credit score of 640 and above. There are also ways to secure a loan with a lower credit score, and this article will break it all down for you.
What credit score is needed for a $20,000 loan? ›
Requirements for a $20,000 Personal Loan
This means they'll want to see your credit score, income level and DTI ratio. Requirements vary by lender, but most lenders require borrowers to have a credit score in the good to excellent range — meaning a score of at least 670.
Can I borrow money with a 500 credit score? ›
However, borrowers with 500 credit scores will have a better chance of approval with the following loan types: Secured personal loans: Secured personal loans require you to pledge collateral, such as a vehicle, savings account, collectible, piece of jewelry, or even the fixtures in your home.
What credit score do I need for a $3,000 loan? ›
You will need a credit score of 580 or higher for a $3,000 personal loan. Most lenders that offer personal loans of $3,000 or more require a 580+ credit score for approval, along with enough income to afford the monthly payments.
What credit score is needed for a $10,000 loan? ›
Requirements will vary across lenders. However, qualifying for a $10,000 personal loan typically requires a credit score that exceeds 640, an active checking account, and a steady, verifiable income, among other factors.
What credit score do I need for a $5000 loan? ›
Requirements for a $5,000 loan vary by lender. But in general, you should have at least Fair credit, which is a score of 580 or above. Lenders may also look at other factors, such as your income and your debt-to-income ratio (DTI), during the application process.
How hard is it to get a $30,000 personal loan? ›
Stringent Eligibility Requirements: Obtaining a $30,000 personal loan often comes with strict eligibility criteria, including high credit score requirements and stable income verification. This can be a significant barrier for those with average or below-average credit histories, limiting access to such loans.
- Credit Score and History. An applicant's credit score is one of the most important factors a lender considers when you apply for a personal loan. ...
- Income. ...
- Debt-to-income Ratio. ...
- Collateral. ...
- Origination Fee. ...
- 4 Personal Loan Documents Your Lender May Require.
Typically, a desirable credit score for a $25,000 personal loan is around 670 and above, but some lenders work with those who have scores from 580 and up.
What is a bad credit score loan? ›
Some lenders cater to applicants with lower credit scores in the poor range (below 580) to help them borrow money for emergency expenses, a medical bill, debt consolidation and other financing needs.
What is the monthly payment on a $20 000 loan? ›
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| Loan Amount | Loan Term (Years) | Estimated Fixed Monthly Payment* |
|---|
| $20,000 | 5 | $415.07 |
| $25,000 | 3 | $771.81 |
| $25,000 | 5 | $514.57 |
| $30,000 | 3 | $926.18 |
13 more rowsA $20,000 loan at 5% for 60 months (5 years) will cost you a total of $22,645.48, whereas the same loan at 3% will cost you $21,562.43.
How much a month would a 20k loan be? ›
The monthly payment on a $20,000 loan ranges from $273 to $2,009, depending on the APR and how long the loan lasts. For example, if you take out a $20,000 loan for one year with an APR of 36%, your monthly payment will be $2,009.
How much can I borrow with a 700 credit score? ›
You can borrow from $1,000 to $100,000 or more with a 700 credit score. The exact amount of money you will get depends on other factors besides your credit score, such as your income, your employment status, the type of loan you get, and even the lender.
Is a 600 credit score good enough for a loan? ›
A 600 FICO® Score is below the average credit score. Some lenders see consumers with scores in the Fair range as having unfavorable credit, and may decline their credit applications.
