Applying for a loan? Here are some frequently asked credit questions to consider
Whether you’re buying a car or house or paying for college, your credit score plays a big role in your ability to get a loan.
To get approved, you’ll need to show lenders you can repay the loan in full and on time. One of the best ways to show this ability is with a strong credit score.
That’s why, if you're considering applying for a loan, it's essential to understand your credit history and how it affects your score.
To help you get started, we broke down seven FAQs about credit you should know before applying for a loan.
Q: How does my credit score affect my ability to get a loan?
A: As mentioned above, almost all lenders use credit scores to help determine if the risk of lending money to you is acceptable to them. Here’s what that looks like in real terms:
- An excellent credit score (720+) generally will allow you to receive the best available offer in terms of interest and repayment options.
- A fair-to-good credit score (630 - 719) typically will allow you to receive the standard offer in terms of interest and repayment options.
- A poor credit score (629 and below) means you might receive a higher interest rate and/or limited repayment options. You may also be less likely to be approved for a loan.
If you have poor credit, you can ask your financial institution if they offer special loans for buyers with unestablished or less-than-perfect credit. This may enable you to get a loan with a reasonable interest rate, even if you have poor or limited credit history.
Q: Will shopping around for the best loan rate hurt my credit score?
A: It depends on whether the lender does a soft or hard credit inquiry. While not typically used, soft credit inquiries will not affect your score at all. These types of inquiries are usually associated with “get prequalified” lender
offers. In most cases, accepting a prequalified offer will eventually require you to submit a formal loan application, which will result in a hard credit pull. Having several hard credit inquiries or loan applications in a short span of time will
temporarily lower your credit score.
To prevent this, research lenders before you apply and try not to draw out your decision too long. Also limit your applications to a narrow timeframe.
The good news is that most credit-scoring models will consider all credit inquires done within 14 days related to a similar lending product as one inquiry.
Q: Does pulling my credit report myself lower my score?
A: Requesting your credit report yourself doesn't lower your score. As a matter of fact, it’s important to check your credit report annually to make sure you are not at risk of identity theft or fraud. Visit annualcreditreport.com for your free credit report. Keep in mind that your report will not include your credit score. You will likely be required to pay a fee if you would like to obtain your credit
score.
Check out this infographic from the Consumer Financial Protection Bureau about why your credit report score may
vary slightly from one credit reporting company to the next.
Q: What are the quickest ways I can increase my credit score?
A: Some of the fastest ways to raise your credit score when preparing to apply for a loan include:
• Paying your credit accounts on time and keeping them in good standing
• Paying down or paying off credit card debt
• Asking your bank or credit union for a credit limit increase
• Disputing inaccurate data on your credit reports
• Using a secured credit card or loan
Q: What are the top things that affect a credit score?
A: The two things that impact your credit score most include:
- Payment history. Whether you've consistently paid bills and other obligations on time is the most important factor in your credit score.
- Amounts owed. Your credit usage, represented by your credit utilization ratio (the sum of all your lines of credit balances divided by the total of all their credit limits) is the next most important factor influencing your credit score.
Q: Will having a cosigner help me get a loan if my credit report isn’t perfect?
A: If you urgently need a loan and don’t have time to work on increasing your credit score, getting someone to cosign on a loan might be a good option to consider. When you apply for a loan with a cosigner, lenders will consider each applicant’s
ability to afford the loan. Although not guaranteed, a “good” cosigner will demonstrate the ability to pay on the loan should you default, giving the lender the confidence to approve your application.
Q: What happens if I can’t get a loan due to my credit history? How can I rebuild my credit?
A:
Ask your lender if they offer any free financial counseling. CAFCU members can connect with a certified financial counselor about their specific situations.
Our financial counselors are certified credit report reviewers, meaning they are qualified to review your credit report and answer questions about credit scoring, building a strong credit history, and correcting any inaccuracies that appear. After
the call, our counselors can provide additional education materials on an array of topics tailored to meet your needs.
If you are not a CAFCU member, you can schedule a FREE financial 1-on-1 today
with one of our certified financial wellness representatives.