How to Improve Your Credit Score Before Applying for a Loan?
Many residents of the United States find it difficult to live without financial assistance from banks, especially if they want to buy a new home or car. To avoid an unexpected refusal after applying for a loan, it is necessary to monitor one's own credit file, paying special attention to indicators such as a credit rating.
Of course, no borrower seeks to worsen their credit rating. However, not everyone knows how it can be improved. Below, you will receive tips that will really help you restore your financial reputation and increase the chances of loan approval.
What is a Credit Score?
The personal credit rating is calculated based on the credit history. It takes into account all records and criteria, starting from the age of the history and ending with the debt burden of the borrower. That is, it is a kind of assessment that helps banks decide on what conditions to give a person a loan. Ratings range from 300 to 850, and each range determines how likely you are to get a loan and at what interest rate. If the score is high, you can claim a lower percentage and a higher amount. Unfortunately, with an extremely low score, banks may refuse to issue a loan.
A high credit rating is the key to financial freedom. It opens many doors for the borrower:
- more profitable loans — lower interest rates and larger amounts;
- a quick review of applications — banks trust those who have a good credit history;
- more opportunities — the borrower has access to “serious” loans, such as a mortgage or a car loan.
What Criteria Form a Credit Rating?
The credit rating depends primarily on the following indicators:
Age Of The Credit History
The earlier a person starts using credit products, the longer their credit history is. Her advanced age suggests that the borrower already has extensive experience working with lenders, which means he knows what he is doing—you can rely on him. A short or zero CI does not provide enough information, so such people have a lower credit rating.
A Large Number of Requests for Loans
Loan requests are reflected in the credit history, as most financial institutions perform a rigorous credit check, which lowers the credit rating. Credit bureaus have access to this information and use it as a criterion for calculating the scoring score. The abundance of requests indicates that a person is often interested in credit products. This means the borrower has a difficult financial situation and often needs money.
Loan Delinquencies
Delinquencies, especially outstanding ones, can seriously damage a person's credit rating and history. Their presence can tell the bank that a person is unreliable, making it risky to give him a loan. Therefore, before taking on new obligations, it is recommended to check for delays in the old ones and, if there are any, repay them immediately. On the contrary, the absence of overdue payments increases the rating, as it concerns responsibility and reliability.
Lack of Information about Loans
If a person has never taken out loans, no one can predict what kind of borrower he will be. Lenders assess the lack of a credit history as a risk factor: they do not know what to expect from a person.
Debt Burden
This parameter shows how much a person is credited and how much he pays off his obligations every month. The load is high if the borrower has several loans at the same time or one, but with a large payment. This indicator also forms a rating, because it shows how high a person's debt burden is.
How to Find Out Your Credit Rating?
The advice that “saving drowning people is the work of drowning people themselves” is still relevant. It is in the borrower's interest to systematically monitor the state of the credit history to understand the actual value of the assessment score. Moreover, it is not difficult to do this.
You must request a copy of your credit report from each of the three major national credit bureaus: Equifax, Experian, and TransUnion. Review each report to see what helps or hurts your rating. You are entitled to a free copy of your credit reports from all three credit bureaus once a year, which can be accessed on the website AnnualCreditReport.com. For a fee, you can watch it an unlimited number of times.
Review the rating and check for any erroneous entries in your credit report. If errors are found, try to challenge them immediately by providing evidence of their infidelity. If the rating is low, take measures to improve it as soon as possible.
8 Ways to Improve Your Credit Score
Check the credit report before applying for a loan. With a score of 740 or higher, obtaining a loan on attractive terms will not be difficult. In the case of a lower rating, you should improve it in advance to increase the chances of approval and favorable conditions. Here's how you can do it:
Pay on Time
The payment history is the most important factor affecting the credit rating. Therefore, the main rule is to pay bills on time. If it is difficult, ask the lender to postpone the payment date until closer to receiving the salary, set up reminders, or enable autopayments.
If there are already delays, pay them off urgently — each new delay worsens the situation. Try to negotiate with creditors so they do not report absences, especially if you have started paying off debts.
The good news is that the impact of delays decreases over time, and after 7 years, they will disappear from the report. To restore your rating faster, pay new bills regularly.
Keep Old Accounts Open
The length of your credit history also affects the rating — the longer it is, the better. Therefore, do not rush to close old accounts, especially those you have opened for a long time.
The effect is noticeable gradually, but closing the oldest account may negatively affect the rating. Keep your accounts open to keep a positive impact on your credit history.
Become An Authorized User
If you have a relative or friend with a credit card with a high limit and an ideal payment history, you can ask them to add you to the list of authorized users. At the same time, you don't need to be given access to the card or its details — your credit rating can improve simply by being linked to this account.
The bank that issued the card must send data on its status to three major credit bureaus: Equifax, Experian, and TransUnion. Most banks do this automatically, but it doesn't hurt to clarify.
This method is especially useful for those who are just starting to build their credit history or have little data in the report. If you already have a credit history, the effect will be less noticeable, but it can help reduce the share of credit usage or smooth out past mistakes.
Limit the Frequency of Applications for New Credit Accounts
Each loan request may lower your rating slightly. If there are a lot of requests, this may affect your score. However, if you apply for the same product within 14 days, they count as a single request, making it easier to find the best bids. The effect of the request lasts up to two years, but its effect weakens over time.
Pay Off Your Debts
Start paying off your debts to improve your credit score. The lower your loan utilization ratio (debt to available limit ratio), the better. Ideally, keep it below 30%.
If the coefficient is high, use the methods of “snowball” (pay off small debts first) or “avalanche” (start with debts with high interest). After paying off part of the debt, it will be reflected in the reports, and your rating will increase within a month.
Use a Secured Credit Card
A secured credit card is a great way to improve your credit history. You make a deposit, which becomes your limit, and use the card as usual. Timely payments help strengthen your rating.
This option suits beginners or those who want to correct past mistakes. The main thing is to pay bills on time, otherwise you may lose your deposit. If you keep a low balance and make regular payments, the results will become noticeable in a few months.
Submit a Request for a Credit Line Increase
To reduce the utilization rate, you can ask to increase the credit limit. This will quickly increase the available credit without changing your balances. The main thing is not to spend additional funds.
If you have a stable income and a good payment history, your chances of approval are high. Ask if this will affect your rating, as a hard query may slightly lower it. The result will be visible quickly as soon as the updated limit is reflected in your report.
Dispute the Errors in the Credit Report
Errors in the credit report can affect your rating. To fix them, request free reports from major bureaus and check them carefully for errors, such as missed payments or unfamiliar records.
If you find an error, submit a request for correction to the appropriate bureaus. They usually must respond and correct the data within 30-45 days.
How Can A Beginner Get A Loan Approved?
If you are a law-abiding citizen but do not have enough “rich” history, simple steps that will create a positive reputation in front of banks will help you.
The first thing to do is to take a small amount with minimal risks. For example, this can be an installment loan to purchase household appliances for a short time. To get approval the first time, show income certificates, clearly indicate the purpose of the loan (what the funds are needed for), and offer collateral or a guarantor if necessary. After receiving a loan, try to repay it on time, after which you immediately apply for new banking products, but for a large amount. Initially, such activity may alert the rating system slightly, but your rating will grow over time, and the banks' confidence will strengthen.
Is It Possible to Increase Your Credit Score Fast?
Of course, when a loan is needed urgently, and the credit rating does not allow you to get a loan, you want to increase it immediately. However, improving your credit score depends on your circumstances and actions. For example, opening a secure card and making regular payments can quickly boost your rating if you don't have a credit history. However, the process will take longer if the reason is missed payments or debts.
Negative events lose their impact over time and disappear after 7-10 years. At the same time, the right steps will help to add positive data and improve the rating.