Credit Scores and Personal Loans: The Facts You Need to Know

Before you decide to get a personal loan in order to purchase a car, pay for home improvements, or cover emergency expenses, you need to make sure your credit is in order. Credit is one of those commonly used terms that people don't really understand. In simplest terms, credit is the reputation you have for paying your bills. Whether or not you've taken out a loan, you have probably had your credit examined in the past. Landlords, credit card companies, even some employers (such as financial institutions) need to know your history of paying back what you owe.

When you apply for a personal loan at a bank or credit union, you can expect the institution to contact a credit bureau. Credit bureaus are agencies which maintain records regarding your repayment history. Any organization which extends credit can report to these bureaus. In the United States, there are three credit bureaus: Trans Union, Experian, and Equifax. All three maintain slightly different records depending on which companies have filed reports. For this reason, your lending institution may check with all three before granting you a personal loan.

After the bank or credit union contacts the credit bureau, your credit report will be send over. The report is simply a collection of data regarding your consumer credit habits, such as a list of your credit cards, loans, or other revolving accounts. Your report will also contain inquiries made by others so the bank can see if you have been applying for credit cards all over town and possibly overextending yourself. Personal information, including your social security number, employment history, and spouse's name, will also be listed in your report.

Many credit reports will also include a credit score. These scores, which range from 375 to 900 points, allow potential lends to quickly evaluate your repayment history and to determine your credit worthiness. The higher your score, the more likely you are to get your personal loan approved and to receive a lower interest rate.

Your credit score is hard to calculate on your own because the credit bureaus employ a complex mathematical formula to determine your rating. Many factors do influence your score, however, and can give you a good idea of where you might rank in the scoring. These factors include how much debt you have outstanding, how well you've made payments in the past, how much credit you've been trying to get recently, and what types of credit you already have.

If your request for a personal loan is denied, it may be because your credit score was adversely affected by having too many or too few open revolving accounts, owing too much existing debt, lacking a long enough credit history, or dozens of other possible reasons. While lenders may not tell you what your credit score was, he or she is required by law to inform you of the reasons for your rejection in writing.

In the end, you need to understand the impact of your credit habits today on your potential for taking out a personal loan tomorrow. Paying your bills on time and only taking out the credit you need are essential steps that will help you get the money you need for the things that you want.

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