You’ve worked hard to pay your bills on time, keep your credit balance low and build up your credit history. In other words, you’ve earned your good credit score.
When it comes to a loan, having a good credit rating can get you lower interest rates, better loan terms and larger borrowing amounts. If this sounds appealing to you, read our guide to find out how to leverage your good credit score to find the best loan for you.
A good credit score generally sits between 650 and 900, but the numbers aren’t as clear-cut as you might think. Even though the two credit bureaux – Equifax and TransUnion – collect the same information to determine your credit score, there’s a slight variance in their algorithms that often results in different scores between them. This means while you might have a score of 650 with one credit bureau, it’s possible your score with the other is 640.
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What makes up your credit score?
The credit bureaus don’t give a specific breakdown of the exact factors that affect your credit score, however, some of the main factors usually include:
Payment history. Paying bills on time positively affects your credit score.
Delinquencies. Declaring bankruptcy or having a collections agency come after you will damage your score.
Balance-to-limit ratio. Running your balances up to your credit limit, or over 50% of your credit limit, can negatively affect your score. Try to keep your balance-to-limit ratio around 30% or less.
Recent inquiries. Applying for a new loan requires a hard pull, which means your score will take a negative hit of about 5 points.
History of accounts. The length of time that you’ve had your accounts open affects your credit score. The longer you have accounts open, the more positively your credit score will be impacted.
Variety of credit accounts. Your credit score will be affected by the balance of credit card and loan accounts in your name. Having a mix of products positively impacts your score.
Too many accounts. Having too many accounts is viewed negatively since this could be a sign of financial troubles.
Applying for too many loans
Applying for multiple loans at the same time can lower your credit score by a few points, which could ultimately impact the interest rate that you’re offered on subsequent loans. In order to maintain a good credit score, keep your inquiries to a minimum by applying for loans for which you meet the eligibility requirements. In addition, always make your loan repayments on time.
What do lenders look for in borrowers with good credit scores?
When considering your application for approval (or rejection), lenders usually look at the following:
Your credit score. With 650 as the “magic number”, you will usually need a score of this number or higher to be eligible for a good credit personal loan.
Your ability to repay your loan. Lenders will look at your current financial situation. They will consider your income and outstanding debts, which will ultimately use those to tell if you’re capable of repaying your loan.
Your debt-to-income ratio. When you apply for a loan, the lender will calculate your debt-to-income ratio. If you have multiple credit card payments, a mortgage and a car payment, your debt-to-income ratio will be high. Since so much of your income goes toward debt already, a lender is less likely to approve your application. On the other hand, if you only have a mortgage and a single credit card payment each month, your debt-to-income ratio will be low and lenders will view you as a better applicant. Most lenders prefer applicants with a debt-to-income ratio of 35% or less.
How does my credit score affect my application?
A good credit rating opens the door for better financing.
While your credit score doesn’t represent your entire financial situation, it can significantly affect many areas of borrowing, including the interest rate you’re offered and the total amount you can borrow.
With that said, lenders place a lot of emphasis on your credit score because it’s a reflection of your ability to meet your financial obligations. Higher scores mean higher reliability, which means less risk for the lender. If you’re less of a risk, your interest rates aren’t going to be as high, and you’re going to have a better chance of getting a less expensive loan.
What types of loans are available to people with a good credit score?
If you have good credit rating, the sky’s the limit when it comes to the loans you qualify for. You should be eligible for a wide variety of loans, including:
Unsecured personal loans. Unsecured personal loans can be used for just about any legitimate purpose. They don’t require collateral, and you may be eligible for loans up to $35,000, or sometimes higher.
Secured personal loans. A lender may be willing to lower the interest rate on a loan even further if you’re able to offer up collateral. The collateral gives the lender security by having something of value that can be collected in case of a default. Your car or home equity is usually used as collateral.
Auto loans. If you own your car outright, you could potentially take out an auto title loan. Since your vehicle is used as collateral, you stand to lose it if you don’t make your repayments on time. You can generally use a car, boat, RV, or motorbike as collateral for an auto title loan.
Start-up loans. When you have a good credit score and a solid business plan, you can fund your new business venture with a start-up loan. Before taking out a loan, look for any grants available to new business owners in your province or territory.
Business loans. Already have an established business? Take the opportunity to grow your business with a little extra capital. Buy equipment, renovate a storefront or even expand using the funds from a business loan.
Debt consolidation loans. If you have debt spread across several different loans, lines of credit and credit cards, you may be able to place them all under one loan, possibly with a lower interest rate. This means you only have to make one repayment to one lender.
How do I compare my loan options if I have a good credit score?
Before you take out a loan, be sure to compare different lenders and loan options. When making your comparisons, consider the following factors:
Interest rate. The interest rate is one of the easiest numbers to compare when looking at different loan options. Good credit usually means you’ll find lower interest rates, but some providers may offer significantly better rates than others.
Fees. Consider any additional fees charged by the lender. Extra fees may include administrative fees, late fees and early repayment fees.
Maximum loan amount. It’s important to consider how much you actually need to borrow versus how much you’re actually allowed to borrow. Only borrow as much money as you need since you have to pay interest on it.
Loan term. A shorter loan term leads to lower overall repayment costs but higher repayments each week or month. On the flip side, you can have lower repayments but end up paying significantly more in interest rates and fees if you opt for a loan with a longer term.
Turnaround time. While fast turnaround times are available from some lenders, they may come with added fees or higher annual percentage interest rates (APRs).
Requirements. Your eligibility is often based on more than just your credit score. Check with lenders you’re interested in to make sure you meet all of the necessary eligibility requirements before you apply for a loan.
How can I improve my credit score?
If you’re looking to improve your credit rating, consider trying the following:
Pay off open balances. It’s important to close your balances by paying them off before taking out another form of credit, whether that’s a new card or a loan. This will improve your credit and show lenders you’re able to fulfill your financial obligations each month.
Keep open balances low. Once you’ve paid down your balances, try to keep them low. Staying below 30% of your credit limit is the advised threshold by many experts.
Have some open balances. Your credit utilization ratio, which is the amount of credit you have open versus the amount you are currently using, looks better when you’re using less than 30% of your open credit.
Avoid opening new accounts. Opening new accounts before you improve your credit score means you’re opening accounts with potentially unfavourable interest rates and loan terms.
Having a good credit score can help you get loans with better terms and lower interest rates. Furthermore, you’ll usually have many more loan types available to you, which means you can compare a wider range of loans and lenders.
Keep in mind that taking out any kind of loan is a big financial decision and should be considered carefully.
Do your research, compare personal lenders, talk to friends and experts – and sleep on it before signing any contracts. By making sure you’re getting a loan that suits your budget, you can protect and possibly even improve your credit score.
Frequently asked questions about good credit personal loans
No, a legitimate lender should not ask you to pay any funds upfront. In many provinces, it is actually illegal for a lender to request any money upfront. If a lender charges an origination or processing fee for a loan, they will typically deduct it from the loan amount. If a lender is asking for a prepaid card loaded with funds or for you to pay loan insurance, you should look elsewhere for a loan – it’s likely a scam. You should also be aware that loan insurance is never required.
TransUnion and Equifax are the two major credit bureaux in Canada.
You will usually need to provide the following:
Your full name
Your email address and phone number
Your date of birth
Your Social Insurance Number (SIN)
A valid government-issued ID
Your employment details
Your income details
Business loans will require more information specific to your business, such as your assets, liabilities and income.
Repayment terms will vary between lenders. Personal loan repayment periods usually vary from one to seven years.
You can focus on building up your credit score by staying up to date with payments on the accounts you have and keeping your accounts open to lengthen your history. Minimum credit history may not be as important as the credit score itself.
While not set in stone, the general credit tiers are as follows:
Rhys Subitch is a writer and editor at finder.com who tackles topics across the site. With half a decade of experience researching, editing and writing for a Fortune 500 company, university and several independent publications, Rhys brings readers the most up-to-date and curated info on all things finance.
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