Why Does My Credit Score Matter to Lenders?
Imagine you had a friend who asked to borrow money from you. No matter how close the two of you are, you’d probably hesitate to lend money to them if they’ve taken a long time to pay loans back in the past—or didn’t pay you back at all.
Lenders operate with the same logic; they’re more likely to lend to people who have a consistent track record of on-time payments. Whether your credit history contains credit cards, home loans, or personal loans, this positive financial behavior typically translates into a higher credit score, and can ultimately lower your interest rate.
How Will a Bank/Lender Use My Credit Score?
Your credit score (specifically, your FICO score) will fall in a range from 300 to 850. When you apply for a loan, a lender will pull and review your credit report. Based on the score that they see, along with other factors like credit history and credit utilization, they will determine whether or not you’re qualified for a loan. They’ll also use your credit report to determine the APR (annual percentage rate, also known as interest rate) that they are willing to offer you.
Take, for example, a credit score of 720 or above. A score like this is considered “excellent”—a borrower with this score would not only most likely be approved for a loan, but would also tend to qualify for better interest rates and terms. Essentially, a higher credit score acts as a strong signal to the lender that you are more likely to repay the loan back.
How Can I Build Up My Credit Score?
If your lender comes back with a high interest rate, don’t fret! Lenders are required to provide you with a free copy of your credit score after calculating your APR, and you’ll want to take advantage of this. The credit score disclosure will include a few points about what’s holding your score down.
While it may be tempting to take the high interest rate, putting in just a few months of work to raise your score can mean the difference between an APR that leaves you smiling and one that leaves you paying more to borrow. Especially if you’re seeking a significant loan amount—a higher score can decrease your monthly payment by hundreds of dollars, adding up to thousands in interest over the life of the loan.
With that in mind, here are some quick tips for building your credit score:
- Check for any mistakes on your credit report and correct them ASAP
- Make all payments—car loans, rent, utilities, credit cards, etc.—on time
- Shop around for loan rates within a 20- to 30-day period. Inquiries into your credit that occur within a smaller time frame only count as one hard inquiry, whereas multiple inquiries spread out over time can ding your score
- Consider debt consolidation as a way to lower your credit utilization across accounts.
Whether your credit score is high or low, applying for a loan can be a complicated process. With our simple 4-step application, we make it easy for applicants of all credit levels to check offers—with funding as soon as 24 hours! Plus, if you have questions, our Loan Agents are just a phone call away. Apply online in minutes to see what offers you qualify for with no effect to credit score!