So, you're thinking about applying for one of those personal loans online. A quick search on the web will show you personal loans for fair credit as well as ones that state they won't require a credit check. The question is, which online loans should you be applying for?
Well, before you even look at any possibilities, the first thing you'll need to do is check your credit score and see if you have a perfect credit score. This number is quite possibly the most important figure in your financial life. Not only is it used by lenders when making decisions on whether or not they will loan you money, it is also used to determine what your loan terms will be. A credit score can also be used by insurance companies to determine your coverage. Even landlords and utility companies can use it to determine whether they need to require you to pay a larger deposit.
We've already mentioned how important your credit score is. At least, we have mentioned why it is important. But what is it?
A credit score is a three-digit number that ranges from 300 to 850. This number is based on a number of factors, such as payment history, the length of your credit history, and the amount of debt you have. The higher the score, the more likely you will be to repay a loan, which causes lenders to feel more confident in letting you borrow money. This also may translate to better terms such as lower interest rates. For other organizations, a higher credit score can indicate financial responsibility.
So, where does your credit score come from? Credit scoring models use an algorithm to calculate your score based on the information found in your credit reports. Your credit reports are generated by three major credit bureaus – Experian, TransUnion, and Equifax. These credit bureaus gather information from various lenders and organizations such as banks and other financial institutions, utilities and cellular providers, landlords, department stores, and insurance companies. The reports contain a detailed summary of the status of your credit accounts and your payment history. In short, it shows who you owe, how much you owe, how much debt you've paid off, and how quickly you paid off your bills.
Take note that not all lenders and other organizations submit their data to all three credit bureaus. In addition, credit scores will depend on which credit bureau provides the information. Moreover, scoring models may weigh their factors differently. For example, FICO puts a lot of weight on the total debt and amount owed when calculating a credit score. VantageScore, on the other hand, places more importance on the age and type of credit as well as the percentage of the credit limit used. In short, don’t be surprised that you have more than one credit score. Credit scoring models also change over time. In fact, FICO will be rolling out its latest versions (the FICO Score 10 and FICO Score 10T) this summer.
Because credit scores have such a significant impact on your life, it's important that you are always aware of what it is at any given time. It's relatively easy to check your credit scores, especially since a number of credit bureaus actually let you check it for free. Other institutions also provide you with free access to your credit score, such as credit card companies. Discover and Citi, for example, provide their cardholders with free access to their FICO scores. Chase and Capital One, on the other hand, offer access to VantageScores. If you're not a cardholder with any of these, there's no need to worry because there are free credit score resources that you can access online such as the Discover Credit Scorecard, the Chase Credit Journey, and CreditWise.
In addition to credit card companies and credit bureaus, there are other sources you can use to get your credit score for free. Lenders can tell you your credit score during your application process with them. Nonprofit credit counselors may also be able to access this information. VantageScore even lists free score providers on their site.
Since credit scores range from 300 to 850, it's not difficult to know what the highest credit score is. In fact, anything that's 800 and above is already considered an excellent credit score. But what's the point of knowing what's the perfect credit score? Does anyone really ever achieve that? To answer the last question first, yes. There are a number (admittedly, very few; less than 1% of consumers) of people who have reached that pinnacle.
If so few people are able to achieve it, why should you know what the maximum score is? There's only one good reason - to give you something to aspire to. For the same reason that students know what the perfect test score is and why athletes know ground-breaking records in their field. It gives them a goal to work towards.
Of course, there are quite a number of benefits to having the perfect credit score. Obviously, if you have the highest score possible, you won't have to look at personal loans for bad credit. In fact, it's just the opposite.
Not only that, you gain the best financing terms possible whenever you apply for a loan or line of credit. Even better, some credit card companies provide generous perks to people with excellent to perfect credit scores. These include low to zero annual fees, great rewards programs, and large sign-up bonuses.
Whether or not you have poor credit, it definitely pays to continuously improve your credit score. While there are online personal loans with no credit check that you can avail of, the path towards financial security and stability means getting better terms when it comes to your loans. So, how do you improve your credit score, whatever it may be? Below are some tips you may want to apply to your financial life:
Payment history is a big factor when it comes to calculating a person's credit score, no matter what credit scoring model you use. This is because it indicates how reliable you are when it comes to paying back money you owe. Your past payment history can give lenders a good foundation for predicting your future payment performance.
So, if you want to improve your credit score, the first thing you need to do is to make sure that all your bills are paid on or before the due date. And we're not just talking about loans and credit card bills. The same rule applies when it comes to your utilities, rent, insurance premiums, etc. If you already have one or more bills that are behind on a payment, you need to make them current as soon as possible. While late payment history will remain on your credit report for seven years, older late payments have a lower impact on your score compared to recent ones.
Credit utilization ratio is the amount of debt you currently have divided by the amount of debt you're available to use. The ideal utilization ratio is 30%. Let's say the total credit limit you have across all your credit cards is $5,000. To keep your utilization ratio at the optimum level, you need to maintain a balance of $1,500.
Why is this important? For lenders, a low credit utilization ratio indicates less risk. Why is that? Well, first, it's because it indicates that you're able to manage your money well. Second, it tells them that you probably won't fall behind on your payments because you don't have a lot of debt to pay off.
This is a habit that every adult should form. It is estimated that about 20% of credit reports have errors. Some errors can negatively impact your scores, such as a wrong account status (when your payment is mistakenly posted as late) or wrong accounts (when accounts reported aren't yours). Checking your credit report once a year (you’re entitled to a free one from all three major credit bureaus) can help you stay on top of your credit history.
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