How to raise your credit score
Raising your credit score is an easy way to save you hundreds of dollars by helping you score a lower interest rate or a better loan. (If your credit score is already perfect, congratulations -- you can skip this step.)
Here are a few immediate steps you can take to boost your credit score before you get a loan:
- Pay off debt, especially credit card debt.
- Make all your payments on-time.
- Don't apply for any new credit cards or loans (until you've finished this personal loan application).
Check our guide to how to build credit fast for more information on raising your credit score before you apply for a loan.
How to qualify for a loan
There's more to qualifying for a loan than having a high credit score. Lenders also look at your income and debt-to-income (DTI) ratio. We'll break it down for you.
Income
You'll need to show a lender you have a dependable income. Let's say you own a carpet installation business and some months are busier than others. Provide income records for the past two or three years to give the lender a fair sense of your "average" income.
If you've changed jobs frequently, be prepared to explain your situation. For example, if you're a nanny who has worked for several families over the past three years, have your income statements together to show the lender you've stayed in the same field during that time.
Control your DTI ratio
Your debt-to-income (DTI) ratio is the amount of money you owe in relation to the amount of money you earn. To calculate your DTI ratio, lenders add up your fixed monthly debts (such as rent or mortgage, car payments, HOA payments, child support, alimony, credit card payments, and payments on other loans), then they divide that number by your monthly income to come up with a DTI ratio.
Let's say your fixed monthly bills come to $3,000 per month and you gross income (the amount earned before taxes and deductions) totals $9,000 per month. You divide $3,000 by $9,000 to come up with a DTI ratio of 33%. ($3,000 ÷ $9,000 = 0.33). A DTI ratio of 36% or less is considered good. When a DTI ratio is higher, lenders begin to worry that you might have more debt than you can reasonably handle.
If you calculate your DTI ratio and learn it's too high, here are three steps that can help bring it down:
- Make more than the minimum payment on the debt with the highest balance. Once you've paid it off, start on the debt with the next highest balance. Be sure to keep making at least the minimum payment on your other debts.
- Use a balance transfer to a credit card with a lower interest rate. You'll still have the debt but the lower rate will allow you to pay it down faster.
- Do not take on any new debt as you work to lower your DTI ratio.
3. Shop around for a personal loan lender
To get a loan that works for you, it's important compare multiple lenders. There are plenty of quick and easy online loans available, as well as loans from brick-and-mortar institutions.
Start by looking for lenders that fit your situation. Some lenders specialize in specific loan types, like renovation loans or medical loans. Others specialize in specific offers, like low-interest personal loans. For example, here are three types of personal loans:
Home improvement: Loans for people looking to make upgrades to their homes. A home improvement loan can be a good idea, particularly if the upgrades increase the value of the property.
Debt consolidation: Loans for those who wish to consolidate several high-interest debts into one loan with a lower interest rate. Debt consolidation loans can be an effective way to pay debt off at a faster clip and improve your credit score.
Peer-to-peer lending: Loans for people who need an alternative loan source. This may be someone who is self-employed and has trouble proving their income, or it could be someone with poor credit who's having trouble securing a traditional personal loan. How this loan is used determines whether it's a good idea.
How to compare lenders
Once you've narrowed your search to a handful of lenders, the best way to compare loans is to get pre-qualified. Getting pre-qualified for a personal loan is simple, and doesn't require any commitments on your end.
Only compare loans with similar terms when deciding where to get a loan. Because fees and interest rates can vary so much, it's a good idea to look at the annual percentage rate (APR) for different loans when comparing. The APR takes into account both the fees and the interest rate, so you get a better picture of what the loan actually costs.
Note: If you're unemployed, you can still qualify for a personal loan. For information on what counts as income on a loan application, check out our guide to getting a loan while unemployed.
