If you have time to build credit before applying, you may improve your chance of qualifying for a personal loan at a low rate. It’ll likely take a few months for these steps to affect your score, but it may be worth it if you get a lower rate on a loan you’ll be repaying for a year or more.
1. Make payments on time
Credit card and loan payments that are more than 30 days past due can cause your credit score to drop by about 100 points. Consider setting up automatic payments or due date reminders to ensure you won’t miss payments on your current debts. If the payment date doesn’t work for you, ask your creditors to change it.
2. Dispute credit reporting errors
Review your credit reports from each of the three credit bureaus — Equifax, Experian and TransUnion — to see if there are any errors that may be dragging your score down, like incorrect account balances or accounts you don’t recognize. Dispute any mistakes online, by mail or by phone.
3. Lower your credit utilization
Your credit utilization ratio is the percentage of your available revolving credit that you’ve used. Try to keep this number below 30%. If it’s higher, take time to pay down your credit card balances and other credit lines. Requesting a credit limit increase can also lower your credit utilization.
4. Become an authorized user on someone’s credit card
If you know someone with a higher credit score who will let you become an authorized user on their credit card, you can benefit from their good credit habits, such as on-time payments or a low credit utilization. You aren’t responsible for the cardholder’s balance and don’t even need access to the credit card.
5. Get a credit-builder loan or secured credit card
Both a credit-builder loan and a secured credit card require you to pay money upfront – either in the form of loan payments or a security deposit – before you borrow from the lender. This reduces the lender’s risk, making them easier to qualify for, while on-time payments build up your credit score
Requirements for a personal loan beyond credit score
Meeting a lender’s requirements for minimum credit score doesn’t necessarily mean you’ll qualify for a loan. Here are the other factors most lenders review on a personal loan application:
- Credit history: Lenders like to see a long credit history on a loan application. A lender may say it requires a minimum of two or three years of credit history, but longer is typically better. More accounts throughout your credit history show a lender how diligently you’ve made payments. Borrowers with multiple credit cards, a mortgage, or an auto loan showing regular on-time payments may be more likely to qualify.
- Income: Lenders may ask for copies of your pay stubs, bank statements or tax documents to ensure you have a steady source of income. Some lenders have specific income requirements, while others just want to know you’re bringing in enough money to repay your personal loan.
- Debt-to-income ratio: Lenders seek borrowers who make enough money to meet their current monthly financial obligations, plus loan payments. Many use your debt-to-income ratio to see whether another loan would overextend your finances.
- Free cash flow: Your debt-to-income ratio doesn’t account for expenses like gas, groceries and rent, so some lenders look at bank account transactions to see how much money borrowers have left after other expenses. Lenders call this “free cash flow,” and the more of it you have, the more confident a lender may feel approving your application. Source