Correlation Between Credit Score and Personal Loans (Forbrukslån)
A credit score or rating is an essential indicator to help you get a loan with low-interest rates and monthly installments. Still, getting a personal loan can affect your score in many aspects, including sound and bad.
Although the process of getting a personal loan will not affect your credit score directly, it will increase your debt-to-income ratio, meaning it would be challenging to get another loan until you pay this one.
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If you pay everything off promptly, you can boost the score. Therefore, if you wish to take a personal loan, we recommend researching and comparing various options. That way, you can get the best interest rates and monthly installments that will fit your financial situation.
Factors Affecting Credit Score
It would be best if you understood how to calculate rating which will help you determine the ways your loan can affect it. The most common option is Fair Isaac Corporation, which will range between three hundred and eight hundred.
Five factors will determine the calculation: amount owed, payment history, credit mix, new credit, and length of credit history. The percentages may vary based on rating agencies. Still, you will learn the importance of these factors in the further article.
- Ten percent depends on new debt
- Length of your history includes fifteen percent of the overall score
- The debt amount is one of the most critical factors, and it uses thirty percent of the rating
- Thirty-five percent depends on your on-time payments
- Finally, the credit mix will include ten percent of the rating
Of course, the rating depends on the major reporting bureaus most lenders turn to. However, they will provide you with similar scores.
Can Application Affect Credit Score?
Getting a new loan for your needs can affect the rating since your outstanding debt will increase. Besides, agencies will consider your new financial activities. Therefore, if you want to get a new loan after receiving money from a personal one, they may reject your application due to the debt-to-income ratio.
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At the same time, overall credit history will affect your ratings more than a new one. Therefore, if you have a history of handling debts with ease by making timely payments, that will increase your ratings and provide you a chance to get an additional loan.
The best and most straightforward way to prevent your new debt from affecting a score is to follow the agreement terms and make payments on time.
How to Boost Credit Score with Personal Loan?
As mentioned above, it is vital to repay everything on time, boosting your rating and demonstrating that you can handle any debt without any additional hassle. It is way better for a score to have a long history of taking loans and repaying them than having nothing in your past.
If you have never got a loan, you will not have a payment history, which will reduce your score. You can check out numerous websites to get a copy of your credit report in the last year or twelve months.
What Rating Should You Have to Obtain a Personal Loan?
Since the credit score ranges between three hundred and eight hundred, you should aim the highest, which will help you get approval and lower interest rates and monthly installments.
Of course, each lending institution comes with specific criteria. Still, when you have six hundred and higher scores, it indicates that you can get any personal loan you need.
We can differentiate five essential categories and ranges of creditworthiness, including:
- Poor – If you have below six hundred, it means you are a risky borrower. As a result, you will not get favorable terms, while they may ask you to provide collateral to get the amount you wanted in the first place.
- Fair – It goes up to 669, which is below average, but some lenders may not approve you depending on your debt-to-income ratio.
- Good – The highest point is 739, meaning you have an above-average rating. Therefore, you are a good candidate for receiving the amount you need.
- Very Good – You can reach above average by going up to eight hundred, meaning they can depend on you.
- Exceptional – Finally, between eight hundred and eight hundred and fifty, lenders will consider you as a perfect borrower. It means you will get the best rates possible and take the money in a matter of days after application.
Suppose you wish to qualify for a personal loan. It would be best to have a reliable credit score to make you a dependable borrower. The average …