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What credit score do I need to get a personal loan?
In this article
Whether it's for a home renovation, a wedding, or you just need a bit of extra cash on hand – a personal loan can be a great solution to access credit without getting into costly credit card debt. In fact, personal loans can be a great tool to access credit and improve yourby helping you build a solid credit history over time.
A personal loan can make all the difference when you need one. However, qualifying for a loan may require a bit of work and a few extra steps, depending on your current financial situation and credit score.
Let's take a look at how your credit score affects your ability to qualify for a personal loan and how to improve your credit score before submitting your personal loan application.
Everyone has a credit score, whether you've checked it or not. A credit score is a three-digit number calculated by the credit bureaus that lets potential lenders know how good you are at paying back credit. The only exception to this is if you do not have any credit history in Canada. There are a number of reasons why you might not have a.
Your credit score is made up of a few different factors (depending on the scoring model), but the calculation is typically based on:
- Payment history
- Number of accounts
- Types of accounts
- Length of credit history
- Credit history to available credit ratio
If you pay your bills on time, use less credit than what you have available, and have a long history of using credit responsibly, your credit score should be in good standing. Having a good credit score means you'll typically qualify for loans and other financial products easily and receive more favourable interest rates.
If you've had trouble with credit before and have a not-so-perfect credit score, that's OK too. You can work to improve your credit score before applying for a loan to secure a better rate.
All personal loans will fall into two general categories: secured and unsecured loans. If you're in the market for a personal loan, knowing the difference between the two can help you qualify for the right type of loan for you.
Refers to a type of loan that requires you to back it with collateral, such as a car. Secured loans are a helpful option when you have a low credit score or limited credit history and don't qualify for an unsecured loan (yet).
Refers to the most common type of loan. The main difference between an unsecured loan and a secured loan is the former doesn't require you to secure it with any collateral. But because the loan is not secured, it typically has higher interest rates.
So which type of personal loan should you get? It depends on your financial situation and comfort. Many lenders now offer the ability to get pre-approved for a loan, which can help you determine what you could qualify for and what type of interest you'll pay.
Every lender is different and your likeliness of qualifying depends on their lending criteria, the type of loan, and your credit score.
For example, if you have a great credit score (typically considered to be 760 and higher), you are likely to have more lenders that are willing to lend to you and you are likely to qualify for the most competitive rates. However, if you have a low credit score (650 is generally considered the minimum credit score you need to get a loan), it may be tougher to secure a loan with favourable terms. Many traditional financial institutions may reject your application. If they do decide to accept you, they may offer you a much higher interest rate, which may not be worth it in the long run.
If you have a low credit score in Canada, don't worry. You have a few different options.
Many alternative lenders on the Canadian market, such as, specialize in helping low credit score individuals apply for personal loans. You can also use your car as collateral to qualify for a secured loan from another type of lender. Just be sure to avoid payday loans, as these loans are high-interest and can be as exceptionally risky.
You can also spend a few months working to improve your credit score to help better your chances by monitoring your credit score and report. Here are our top three tips to help you improve your score before submitting your personal loan application.
1. Pay your bills on time, every time
Make your payments on time. Your payment history makes up 35% of your credit score, which is the most of any factor, so it's essential that you prioritize on-time payments. If you have any past-due payments, try your best to clear those up a few months before applying for a personal loan. You can set reminders on your phone to ensure you don't miss payments in the future.
2. Keep your credit utilization in check
According to the credit bureaus, you'll want to keep your credit utilization (how much of your available credit) below 30% for any revolving credit account. Being mindful of how much credit you're using will demonstrate to lenders that you are responsible with credit. Your credit utilization ratio accounts for about 30% of your credit score, so you should see an improvement if you start limiting how much credit you use.
3. Have a long history of credit and keep old accounts open
Having a long credit history is extremely valuable when applying for a personal loan. If you have a credit account that you don't use much, keep it open because closing your longest credit account can negatively affect your score. By leaving it open, you can continue to improve your credit score over time.
You can also work on.
Tassie heads up ClearScore Canada. She lives in Toronto with her husband and two young boys. In her free time, she can be found at the family lake house or playing ball hockey.