Your credit score is one of the most important factors before filing a personal loan application. Most online money lenders and financial institutions will not consider your application if you do not fill their minimum credit score requirement. So today, in this article, we will discuss the credit score one needs to have to secure the personal loans Canada has to offer.
A personal loan involves taking on an unsecured withdrawal where the borrowing party is not obligated to offer collateral to the money lender. But, most money lenders will check your credit health and ensure you earn enough and can pay back the loan amount.
A credit score is a number that helps banks and financial institutions determine the consumer’s creditworthiness. This credit score is usually between 300 to 850. A borrower with a higher credit score is more likely to receive a personal loan. A consumer’s credit hero score score is calculated based on credit history, payment history, number of open accounts, and various other factors. Money lenders and banks use credit scores to determine the probability that a consumer will promptly repay the loan in monthly installments.
What credit score do you need to have for a personal loan?
A personal loan’s minimum credit score varies from bank to bank. Most of the big financial institutions of the country, like credit unions and national banks, require an excellent credit score which has to be above 660. In contrast, online money lenders will approve your personal loan if you have a fair credit score between 560-659.
Some money lenders may also approve your loan even if you have a bad credit score below 560. However, you might be charged higher interest rates. So you must check the terms and conditions of the various lenders and compare their interest rates and charges before applying for a personal loan.
What factors affect the credit score of a borrower?
Factors that affect the credit scores positively
- Paying your monthly EMIs on time
- Making your credit card payments on time
- By paying not only the minimum due amount but the entire outstanding balance of a loan
Factors which affect credit score negatively
- If the consumer has too many unsecured forms of lines of credit
- Delay in payment of credit card bills and monthly installments
- Paying only the minimum due amount for credit cards and the remaining balance is still overdue
- Maxing out your credit cards or using more than 75% of your credit limit
Ways by which your credit score will impact your loan application
A credit score plays a huge role in the approval of your loan application.
1. Crucial role
When applying for a personal loan, your credit score has a significant role apart from other eligibility criteria like employment history, credit history and salary.
2. Personal loan with low or no credit score
A personal loan can be availed even if you have a low or no credit score. However, banks may take a longer processing time as they will be doing additional background checks. Additionally, you also might not get the best deal.
Another critical parameter considered during the personal loan approval process is the repayment history. A good credit score also means that you have a good repayment history.
How to check your credit score?
You can follow these methods to check your credit score online.
1. Credit bureaus
2. Budgeting applications
Hundreds of financial applications on the Google Play Store help consumers check and update their credit scores once they sign up.
3. Online Services
Hundreds of websites allow consumers to check their credit scores online by filling out a quick online application form. You must fill out basic information on the form like your name, phone number, DOB and address.
4. Account statements
You might be able to view your current credit score on various bank statements, loan statements, and other financial products.
5. Credit card and banking applications
If your bank has an application, you can quickly sign up and check your credit score. The application will also send out notifications whenever there is a change in your credit score.
Your credit score is usually calculated based on soft credit inquiry. However, this inquiry will not affect your credit score, but it might not be 100% accurate as a hard credit pull. When you apply for a personal loan, money lenders or financial institutions evaluate your application by performing a hard pull on your credit history, which will temporarily decrease your credit score.
How to improve your credit score before applying for a personal loan?
You can apply these methods to improve your credit score before applying for a personal loan.
1. You can apply for a credit builder loan
Some banks, financial institutions and credit unions often offer low-cost small-dollar loans to help the borrowers improve their credit scores and establish a rainy day fund.
2. Check your credit score regularly
You can access two free copies of your credit report per year, one from each of the bureaus. You can visit the official website, request a copy of your credit score, and ensure that it is accurate. You can always contact your creditors to let them know about any mistakes on your credit report.
3. Pay off the outstanding balance
Do you have a lot of credit card debt or loans? To improve your credit score, start paying off some of your existing debts or balances. This way, you can lower your credit utilization ratio and improve your credit score.
You are eligible for a personal loan with almost any credit score, even if you do not have a credit score. However, if you have a good credit score of more than 760, you will have better options, and you might get lower interest rates. So it is always advised that you take some time to improve your credit rating and get a favourable deal.