Editorial note: We earn commission from partner links on Forbes Advisor. Panels do not influence editors’ opinions or ratings.
Personal loans are among the most versatile and practical loan products on the market. But like any form of maturing debt, the requirements to take out one of them can be stringent. Additionally, different lenders will have different minimum requirements and different credit scores will give you different loan terms.
For example, we recommend a minimum credit score of 670 to qualify for a personal loan. However, there are some lenders who may require higher credit scores and others only require a minimum score of 580. However, the best terms are usually reserved for highly qualified applicants.
We will guide you on how to increase your chances of qualifying and how to improve your score for more favorable loan terms.
Factors that affect your credit score
There are many credit scoring forms, but FICO is the most likely form that a lender will use, which consists of the following components.
Payment history represents 35% of your credit score and indicates your history of on-time monthly debt payments. Since it makes up such a large part of your credit score, a missed payment can cause a drop of 100 points.
Lenders can only report late payments in the last 30 days. If it’s only a few days since your due date, you’re in the clear. The number of days late and how long ago you missed a payment also has an effect on your score. For example, a 30-day late payment is better than a 60-day late payment, and a late payment this month affects your score more than one of 2018. Over time, the effect of a late payment will diminish.
use of credit
Credit usage makes up 30% of your credit score and indicates how much credit you use compared to your total credit limit. You should aim for less than 30% but above 0%. Credit bureaus look at both the credit usage of each individual card and the total credit usage among all of your credit cards.
For example, let’s say you have a balance of $2,000 in a credit card with a total credit limit of $10,000. In this case, the utilization ratio is 20%. If you pay $1,500, the new rate will be 5%.
Length of credit history
Your average credit age makes up 15% of your credit score. Consumers with older credit history may have higher credit scores than those with newer accounts. Lenders love a longer credit history because it proves that you can manage credit responsibly.
Revolving credit and installment are two types of credit products. Having both revolving and installment accounts means you have a good credit mix, which is 10% of your credit score.
Revolving credit refers to credit cards because there is no confirmed payment history, and the user can keep the account open for an unlimited period of time. An installment credit product is a loan with a fixed repayment date, such as a mortgage, student loan, car loan, or personal loan.
New credit and difficult inquiries
Serious inquiry is made when applying for a new credit product and the lender checks your credit profile. These inquiries will remain on your credit report for two years but will stop affecting your credit score after one year. The number of difficult inquiries makes up 10% of your credit score.
How to improve your score if it is too low
If your credit score is less than 660, you may find it difficult to qualify for a personal loan. Here are some simple ways to fix and improve your credit score:
1. Remove errors
According to research from the Federal Trade Commission, one in five people makes an error on their credit report, which can lead to a lower credit score.
Visit AnnualCreditReport.com and view the three credit reports from Equifax, Experian, and TransUnion. If you notice an error, you can file a dispute directly with the credit bureau.
If you see a negative tag that you recognize, check to see when it was originally created. Most of them decline after seven years, but sometimes the company reports after that time. File a dispute with each credit bureau to resolve this issue.
2. Lower your credit utilization ratio
You can damage your credit score if your credit utilization is above 30%. Fortunately, you can quickly improve your score by reducing usage. The easiest way to do this is to ask for a credit limit increase or to pay off your credit.
If you have multiple credit cards, focus on the one with the highest usage. Once that percentage is below 30%, start paying extra on the person with the next highest usage. Do this until the usage rates for each credit card are less than 30%.
3. Stop applying for new credit
Since serious inquiries and average credit age make up 20% of your credit score, you should avoid opening new credit accounts if you want to improve your score.
4. Pay your bills on time
Your on-time payment history is the most important factor in determining your score, so paying bills on or before the due date can have a huge impact. Set calendar reminders for each credit card or loan due date. You can also set up automatic payments through the lender as well.
If you set up automatic payment, make sure you always have enough money in your bank account. If payment is not made and the due date is missed, you may end up with a delayed payment.
Other Factors Affecting Personal Loan Eligibility
Your credit score is not the only component that lenders look at. Here are some other factors that can affect your application:
Debt to Income Ratio
The debt-to-income ratio (DTI) is the percentage of your monthly debt payments divided by your monthly gross income. Personal loan companies typically prefer to see a DTI of 36% or less; However, some will allow a DTI of up to 50%.
You can calculate your DTI by adding the minimum monthly loan and credit card payments. Next, divide that number by your total monthly income, which is your pre-tax income divided by 12.
Many personal loan companies have a minimum annual income, which varies depending on the lender. For example, Avant has a minimum income of $20,000 while SoFi has a minimum income of $45,000. Before applying with a lender, review their income requirements to make sure you qualify.
Personal loans for fair or bad credit
Borrowers with credit scores below 669 have fair or bad credit, which reduces their chances of qualifying for a personal loan. But there are some lenders that cater to these borrowers. Most of them will charge higher interest rates and offer lower loan amounts than they would to borrowers with good or excellent credit.
Lenders that specialize in fair credit borrowers (580-669) include Upgrade, Wells Fargo, Avant, LightStream, Marcus, and Rocket Loans, to name a few. Borrowers with bad credit (350-579) can apply for a personal loan from Upstart, Lending Club, Wells Fargo, Avant, and Upgrade.
Compare personal loan rates from top lenders
Compare personal loan rates in 2 minutes with Credible.com