Lenders consider a few different factors when determining your loan eligibility and the loan terms. Along with income and employment, they'll evaluate your FICO score to determine your credit rating. A higher FICO score means more approvals at lower interest rates, and lower scores mean the opposite. There's no single credit rating that guarantees approvals, but certain credit score ranges have better chances of approval.
Luckily, your credit score doesn't affect your ability to take out federal student loans. The government understands that most students don't have a significant credit history. Unless you've defaulted on another student loan, they won't consider your credit history when evaluating eligibility for Stafford and Perkins loans. Private student loans are a different story. Along with your income, debt and bankruptcies, banks will evaluate your credit score when evaluating your loan application. According to FinAid.org, most students with a score under 630 aren't able to obtain a student loan; two-thirds of the loans go to applicants with a score of 650 or higher.
Your credit rating makes a difference when you're taking out a loan for a car. According to Cars Direct, the best loans with the lowest interest rates go to applicants with a score of 740 or higher. Applicants with scores in the high 600s can still get auto loans, but they'll pay higher interest rates. Aim for a score of at least 620 to get a loan that doesn't have an astronomical interest rate. Lenders will also evaluate your current income and employment situation when they decide how much money they're willing to lend you.
If you're thinking about buying a home in the near future, your credit rating will be a big deal. According to a survey conducted by the U.S. Department of Housing and Urban Development, lenders have all but stopped issuing mortgages to applicants with credit scores less than 620. The government-sponsored enterprises that issue mortgages, Fannie Mae and Freddie Mac, charge extra fees if an applicant's credit score is below 740. Since mortgages tend to be large loans, maintaining a high credit score not only improves your chance of approval, it can save you thousands of dollars in fees.
Increasing Your Rating
If you're looking for a loan and your credit rating isn't fantastic, all hope isn't lost. Order a copy of your credit report at least once a year and ensure there's no incorrect information on the report. Use only a small percentage of your available credit and make payments on time to increase your credit score. It takes time to repair credit, so start making changes now to be in tip-top shape for loan applications down the road.
- U.S. Department of Housing and Urban Development: 2012 Annual Report to Congress
- Fox Business: Do I Need a Good Credit Score to Get Student Loans?
- Cars Direct: What Credit Score Do You Need for an Auto Loan?
Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.