Thinking of applying for a personal loan? You might be surprised to know that your credit score can actually determine the types of personal loans and interest rates you may be eligible for. Find out more about the relationship between credit scores and personal loans below:
How does credit score affect personal loans?
Your credit score is calculated using your financial history, which is documented in your credit report. Lenders use this score to assess how much risk there is involved in lending money to you. Your financial history consists of information such as:
- How many accounts you have had, both open and closed
- The types of accounts you have e.g. revolving or instalment credit
- How much you owe on each account
- How well you’ve managed your repayments in the past
- Whether you’ve previously defaulted on any accounts
If your credit score is lower, lenders consider you to be a higher risk. As a result, you might be denied a personal loan or only be eligible for one with a higher interest rate. On the other hand, if you have a good score, you are considered to be a better quality borrower. Lenders are generally more willing to offer a better interest rate or extend your credit if you have a higher credit score.
Are credit scores the only way lenders evaluate personal loan applications?
Today, big banks are no longer the only companies offering finance; there are now many other lenders in the market. Modern lenders not only use your credit score to determine if your application will be approved or rejected. Other factors, such as your income, employment history and current employment status, can all play a part in a lender’s final decision. Sometimes, an approval or rejection is very much down to the lender’s risk appetite. If you find that SocietyOne can’t help you with your application for a personal loan, we’ve partnered with several other lenders who can help you to achieve your financial goals.
Using a personal loan to improve your credit rating
It’s possible to use a personal loan to build a good credit score. If you successfully pay off a personal loan on time, it shows you’re reliable and trustworthy. Lenders will look favourably upon applicants who have shown evidence that they can pay off debts of any kind. This can include credit card payments, car payments, personal loans and mortgages
Since 2018, credit reports in Australia have included more than just negative events; they also document evidence such as:
- Limits on your credit cards and loan amounts
- The types of accounts you have previously held, e.g. when you opened and closed them.
- Whether you have made repayments on time.
How a personal loan can hurt your credit rating
Just as a personal loan can help your credit rating, it can also have a negative impact if you fail to make repayments on time. Some of the ways you can damage your credit rating include:
- Failing to make payments on time
- Payment defaults
- Making too many loan enquiries over a short period of time
If you’re wondering how much a loan affects your credit score, the answer is a lot. A personal loan can be one of the best or worst things for your credit rating - the outcome is really down to you. Keep up with payments and ensure you pay on time every month and your credit rating is more than likely to improve over time.
Can paying off a loan early boost your credit rating?
Paying off loans on time will undoubtedly boost your credit rating, but what happens when you pay off a personal loan early? It might seem like a good idea, but you’ll find that it won’t boost your credit score in doing so. Demonstrating consistent repayment on time over an extended period of time can help improve your score and give lenders an opportunity to note that you can be trustworthy and responsible with credit.
If for any reason you’re worried you won’t be able to pay the loan back in the future, you should definitely pay it back as soon as possible. You may want to also avoid the interest charges or prevent any risk of overspending. For any of these reasons and more, it’s always best to avoid going into arrears.
How can I find my score or get my credit report?
Knowing your credit rating is a great way to stay in control of your finances. It’s easy to do as well. You can use SocietyOne’s free Credit Score service to check your rating and gain access to additional features and benefits.