A Personal Loan can be a lifesaver when you need funds for an urgent expense or to consolidate your existing debt. However, before you start the process, you must check your credit score. Your credit score is the essential factor lenders use before approving your loan. In this article, we will discuss why checking it is critical before applying for a loan and what you can do to improve your credit score.
Understanding Credit Score Check
It is a three-digit number that gives your creditworthiness based on your credit history. It ranges from 300 to 850, with higher scores indicating better creditworthiness. Your credit score is calculated based on various factors. These factors are your payment history, credit utilisation, length of credit history, credit mix and new credit inquiries.
A credit score check involves obtaining your credit report from one or more credit bureaus: Equifax, Experian, and TransUnion. Your credit report contains information about you. This information includes credit accounts, payment history, and outstanding balances. Also, it has negative marks such as late payments, defaults, or bankruptcies.
Why Checking Your Credit Score is Critical Before Applying for a Personal Loan
A credit score check before applying for a Personal Loan is critical for several reasons:
- It helps You Know Your Eligibility.
Your credit score is one of the primary factors lenders consider when processing your application. If you have a low score, you might not qualify. In addition, it will make you pay more interest. By checking your credit score beforehand, you can know your eligibility and save time and effort on loan applications that are unlikely to get approved.
2. It Helps You Get Better Interest Rates.
A good credit score improves your likelihood of getting approval or the loan. It also helps you get better interest rates. Lenders offer low rates of interest to borrowers with good credit scores as they are considered less risky. By improving your credit score, you can save money on interest payments over the life of your loan.
3. It helps You Correct Errors.
Your credit report may contain errors or inaccuracies that can negatively impact your credit score. You can identify any mistakes just by checking your credit score regularly. Furthermore, you can correct them before applying for a loan. This can help you avoid being denied a loan or paying a higher interest rate due to mistakes on your credit report.
4. It helps You Improve Your Credit Score.
If your credit score is low, checking it can help you identify areas of improvement. By improving your credit score, you can increase your chances of getting loan approval and better interest rates. There exist various ways through which you can improve your credit score. These ways include paying your bills on time, reducing your credit utilisation, and disputing errors on your credit report.
How to Check Your Credit Score
Checking your credit score is easy and can be done online for free. Free credit reports are available once a year from the three major credit bureaus. Some websites also offer free credit monitoring services that regularly update your credit score and report. You can also purchase your credit score and report from the credit bureaus or other websites that offer this service.
Tips for Improving Your Credit Score
While improving your credit score requires effort and time, the long-term benefits are worth it. Here are tips that can help you improve your credit score:
- Timely payments of bills: Late payments can significantly negatively impact your credit score. Remember to pay all your bills on time, including credit card, loan, and utility bills.
2. Reduce your credit utilisation: Your credit utilisation is the credit amount you use compared to your credit limit. Keep your credit utilisation below 30% to improve your credit score. Then, you can pay down your balances or request a credit limit increase.
3. Dispute errors on your credit report: Reviewing your credit report and reporting any errors or inaccuracies are recommended. Contact the credit bureau and provide evidence to support your dispute.
4. Keep old credit accounts open: The length of your credit history is essential to your credit score. Keeping old credit accounts open and active can help improve your credit score.
5. Avoid applying for new credit: Each time you apply for new credit, it generates a hard inquiry on your credit report. It can lower your credit score. Avoid applying for new credit unless it is necessary.
Performing a credit score check before a personal loan application process can make a significant difference in your financial future. You can understand how lenders view you as a borrower by checking your credit score. You can take various steps to improve your credit score if necessary.
As already mentioned, your credit score is calculated based on various factors. By monitoring and improving them, you can boost your score. As a result, you ultimately increase your chances of loan approval.
Checking your credit score is easy and convenient. For free, you can perform a credit score check through various credit monitoring services. Also, you can purchase your credit score and report it from the credit bureaus. Reviewing your credit report regularly is also essential. It can help you identify errors or inaccuracies that could negatively impact your credit score.
Improving your credit score may take time and effort, but the long-term benefits make it worthwhile. For example, maintaining a good credit score can save money on interest payments, qualify for better loan terms, and increase your chances of being approved for other credit products such as credit cards and mortgages. If you plan to apply for a Personal Loan or any other credit product, check your credit score first and take steps to improve it if necessary.