What Credit Score Do I Need for a Personal Loan?

When you apply for financing, you may wonder whether there’s an ideal credit score for personal loan approval. This article will explore the connection between your credit score and loan options, the reasons why lenders review your credit, and strategies to enhance your score.

Recent credit score trends

In 2014, the average credit score was 692. Today, the average score in the US is 716. This average is calculated from the scores of 232 million people, so that’s a significant increase!

There are several reasons for the upward trend.

Early pandemic job losses caused many Americans to initially stop purchasing with credit. Instead, many only made payments on their accounts, which increased overall credit scores as borrowers reduced their Credit Utilization Rate.

Post-pandemic credit scores are rising as people continue practicing conservative financial habits. As of the time of this writing in early 2024, the US job market doesn’t feel great, so many of us are concerned about our financial health. We’re just not taking financial risks like we might in a strong job market.

Most of us also feel a sense of pride when our credit scores increase, so we’re motivated to keep the momentum going!

Why does my credit score matter for personal loans?

Credit scores help lenders quickly sort borrowers into different risk categories.

Lower scores signal that someone could be a potential borrowing risk. They may not have an established credit history, so they're an unknown risk — or they've experienced financial mishaps such as late payments, defaulted loans, or bankruptcy.

Low credit scores can also flag borrowers who may be unable to take on the responsibility of more credit. While lenders are looking out for their own interests, denying credit applications can also prevent borrowers from becoming financially overwhelmed with too many loans.

Higher credit scores often show a borrower has a proven track record of responsible credit behavior and healthy finances. Borrowers with high credit scores and positive credit histories pose less potential risk for lenders, so they're more likely to get approved for traditional financing options.

Overview of personal loans

So, does this mean only borrowers with good credit get approved for loans? Not at all! There’s a wide range of loan products available for borrowers at nearly every credit level. In fact, many lenders specialize in providing personal loans to borrowers with poor or no credit.

Here are some personal loans you might consider with less-than-perfect credit:

• Installment Loans
• Payday Loans
• Personal Lines of Credit
• Collateral loans
• Title loans
• Unsecured loans

The key is to find loans available for your credit range, understand each lender’s requirements and terms, and pick the best loan for your needs and budget.

How do different credit scores affect personal loan approval?

Even if you know your credit score, you might not understand how a lender might interpret it. Here’s a quick explanation of each credit range and how it affects loan eligibility.

Poor: less than 580

A score under 580 usually means the borrower has negative actions on their credit report. Borrowers in this range may find it challenging to qualify for loans without a co-signer. Loans offered to borrowers with the lowest scores typically have higher interest rates and fees that could strain your budget.

If your score falls into this range, consider giving yourself time to improve your credit before you apply for a personal loan to increase your chance of approval.

Fair: 580-669

Borrowers with fair credit scores can have an easier time than those with poor credit but still face limitations. They may only be approved to borrow small amounts at interest rates that are still considered high.

If you’re approved for a loan with fair credit, take it as an opportunity to start building a good reputation as a borrower. Try to pay off your loan as soon as you can if your loan doesn’t have pre-payment penalties. Quickly paying off your loan can help you avoid paying extra money in interest, and it establishes an on-time payment history that future lenders like to see on your credit report.

Good: 670 - 739

As mentioned earlier, this is the credit range the average American falls into. Borrowers with good credit scores typically enjoy better loan offers and have a better chance of being approved.

If your score falls into this range, take time to research the lender and their rates before making a decision. Depending on your borrow amount, even the difference in one percentage point can mean hundreds of dollars in interest charges.

Very Good: 740- 799

Borrowers with very good credit scores tend to be approved for their loans. Interest rates are even lower than good credit loans and borrowing amounts are higher. There are many loan products offered in this credit score range and you may see lender names that you didn’t when your score was lower.

As mentioned before, the wide range of available loans means doing homework to find the best offer. Just because it’s easier to qualify for loans with very good credit doesn’t mean you want to spend more in interest than you have to. After all, good financial behavior got your score here, so why not keep making smart money decisions?

Excellent: 800 or above

This is the top-tier credit range. Excellent credit borrowers have their pick of low-interest loans with higher borrowing amounts. They’re the lowest risk for lenders which is why they receive the best credit card and personal loan offers.

If you’re discouraged by comparing your current score to someone in the 800+ range, don’t be! Lots of intentional work and time goes into building this level of credit.

In fact, it takes an average of 22 years to reach a credit score of 800! This means borrowers with excellent credit tend to be older, with many years of positive financial behavior in their credit history.

How can I qualify for better personal loans?

Here are some steps you can take to improve your credit score for personal loan offers:

• Make all payments on time. Having a history of on-time payments is the best way to show lenders responsible borrower behavior.
• Pay off debts in full. This is the next most important behavior lenders look for in potential borrowers. If you can't pay off a debt in full, start putting any extra windfall toward paying down the balance.
• Don’t max out credit cards. The higher your credit card balances, the lower your score is likely to be. Avoid maxing out any new cards and start paying down high account balances.
• Don’t close credit accounts you’ve paid off. While you might be tempted to close paid-off accounts to avoid using them, having an open credit account with a zero balance lowers your Credit Utilization Rate, which helps raise your score.
• Check your credit report and report any mistakes. Pulling your own credit report 1-2 times a year is a good habit because sometimes lenders report the wrong information. Go over your credit report carefully. If you see anything that looks wrong, contact the credit bureaus immediately to have them look into it.

Are there any loans I can get with bad credit?

Borrowers with bad credit may still qualify for personal loans. Some bad-credit loans are even designed to help people rebuild or repair credit after financial setbacks.

Here are some loans to look into:

• Secured loans require collateral such as a car, house, or other valuable asset.
• Co-signer loans require a second borrower with good credit who applies with you on the loan.
• Payday Loans or Cash Advances take your employment and income into account, not just your score.
• Credit-builder loans operate in reverse of traditional loans. The amount you borrow is put into an account, you make all the loan payments as agreed to establish a positive payment history, and only then do you receive the loan funds.

Apply for a personal loan with Advance America

Bottom line, your credit history and score can determine what loan options are available, but there are lenders and personal loan products for nearly every level of credit.

Whatever credit range you happen to fall into, Advance America can help. Explore our loan options and apply now to get your instant approval decision.