Credit Score and Loans

Your Credit Score and Your Loan Application

If you are applying for a loan, you know that the lender is going to get a copy of your credit report and score. Your score will mean several things to lenders, such as whether they should give you the loan, how much to grant you, and what your interest rate should be. This is based on several factors regarding your score. For instance, if you have a not-so-great credit rating, you may still get the loan but you won’t be happy with the interest rate. It might pay to wait and clean up your credit first.

Understanding Where You Stand: Your Credit Score

The first step to understanding credit score and loans is knowing where you stand. The national median score is around 723, which means this number splits the American population exactly in half. If your score is above that number, you’re in good shape. Below that is still considered good down to about 650, but you may not get the interest rate you want.

This is because the risk increases for delinquencies and defaults as scores decline. This chart of delinquency rates will help you understand more about this.

Credit Score Rate of Delinquency

- 499 and lower        87%
- 500-549                71%
- 550-599                51%
- 600-649                31%
- 650-699                15%
- 700-749                5%
- 749-799                2%
- 800+                    1%

Lenders and Your Credit Score: A Risk Analysis

This helps the lender understand the risk involved in every loan. The higher the delinquency rate, then, the higher the interest rate. The loan company will charge you for taking a chance on you. Although there is little difference between the three 700 and above groups, the numbers change dramatically with the 699 and below groups. So if you were a lender, you might reserve the best interest rates for the groups 700 and above because they are less risk.

Most Credit Scores are Incorrect

It’s interesting to not that very few people know their credit score, but it’s estimated that 78% of them have errors. These errors account for many credit scores that could stand improvement. It pays for everyone to check their credit reports periodically. The three major credit reporting agencies are required to give you one free report per year, and you should use this. Order your report from each one—they may have different information on you.

Check For Errors Regularly

Once you have it, check for errors. Make a list, then send letters to the creditors outlining the problem, and offering any proof you can that it’s an error. Send a copy to the credit reporting agency. Although the process of getting corrections completed (and making sure the reporting agencies are notified by the creditors of the changes) can take a few months, it will be a huge boost to your credit score.