When applying for a personal loan, it is very important that you have a good credit score. Only then will you be able to get the loan at low interest rates. With a bad credit, you will be forced to pay a higher interest. And if you are worried about whether your weak credit score will affect your loan application, follow the below tips to improve your credit score before you apply for a personal loan.
1. Look For Errors
The first thing you should do is to order a full copy of the credit report and check for any errors. In cases where people have been responsible with the use of their credit, their low credit score was seen to be the result of mistakes in the credit report. This is why a thorough check on your report is absolutely necessary. And when you find any errors, make sure to report them to the credit information company as soon as possible. If your observation is valid, then the company will correct its errors and update your credit score to a higher level which will help you when you apply for personal loans. However, do keep in mind that the company can take anywhere from a few days to up to a month to correct these errors.
2. Never Close Old Accounts
Some people might not use their credit cards for too long. As a result, they might decide to close such accounts. This, however, is a bad idea. You should never surrender or close any long-term credit card account just because you have not been using it. This is because the length of your credit account will have a direct effect on the credit score. The longer the account has been open, the better your credit score will be.
3. Check Credit Card Balance
In case there is nothing wrong with the credit report, you should check out your credit card balances. If there is any large outstanding credit card balance, it will have a negative impact on your credit score. The only way to resolve the issue is by paying off a good portion of the debt. This can either be done by liquidating your asset and using the proceeds to pay off the debt or by getting a bridge loan. The benefit of a bridge loan is that you can get one for a far lower interest rate when compared to credit card rates. And when you do pay off a part of the outstanding credit card debt, check the updated credit report and you should see that the score has improved.
4. >Automate Payments
If you have a history of timely credit card repayments, your credit score will be good enough to get you a loan. But if you delay such payments, then the score will become weak and you will have a tough time getting a personal loan. The best way to ensure that the credit card debt is paid on time is to set up automatic payments through your bank account. This way, your bank will be debited every month with the amount of credit card dues. And this will ensure that your credit card debts are paid on time month after month.
5. Credit Utilization
Credit utilization will also play an important part in determining your credit score. This essentially refers to the amount of credit you are using as compared to the credit made available to you. If your credit utilization is high, it will likely have a negative effect on the credit score. To remain on the safe side, it is recommended that you only utilize about 30% of your credit. This will avoid the negative effects of high credit utilization on the credit score.
6. Soft Credit Checks
Your credit score can also be affected every time you just apply for a loan. This usually happens when the lender performs what is called a ‘hard credit check’. The good news is that the lender will require your authorization to do such a check. So, if you are ever requested to agree to it, you should consider declining the request. Hard credit checks are known to stay on the credit report for at least a period of two years. And in this timeframe, they tend to adversely impact the credit score. As such, it is better if you only choose to apply to lenders who do a soft credit check. This way, even if you do not receive any funds from the lender, you can avoid damaging the credit score.