When lenders decide whether or not to extend credit to you, they’re assessing the amount of debt they think you can realistically take on given your income, employment history, and credit history.
So the size and type of loan you’re applying for can also affect the outcome. Personal loan lenders may turn down an applicant with a good credit score, then turn around and make a loan to someone with a lower score because the person with the lower score was considered a better risk.
Every lender has its own underwriting models, so just because you’re turned down by one lender doesn’t mean another won’t say yes. The Credible marketplace lets you request rates from multiple lenders in two minutes without affecting your credit score. We’ve found that most borrowers who are eligible to refinance their student loans get rates from some lenders and are turned down by others.
Why credit scores matter
Credit scores were developed to help lenders predict the likelihood that a given borrower will make their scheduled payments until a loan has been fully repaid. In addition to helping lenders determine whether to approve someone for a loan, credit scores are also used to determine your interest rate.
While the credit score isn’t the only factor you need to consider, anything you can do to improve your credit score will boost your chances of being approved for a loan, and save you money if you’re able to obtain a lower interest rate.
If you’re a student and haven’t yet established a credit history, you might consider asking a relative or friend to co-sign a loan. Adding a cosigner can increase your chance of being approved for a loan, and get you a lower interest rate. Nearly 94 percent of private undergraduate student loans now involve cosigners, up from about 75 percent in 2008-2009.
There are a number of credit scores — FICO and VantageScore are two of the most common — but in general, they work the same way. Think of a credit score as a mathematical formula that takes facts about your credit history and spits out a number that’s used to assess the likelihood that you’ll make payments on time.
Check your credit report
The facts that are plugged into the credit score — such as the percentage of payments you’ve made on time, how much of your available credit card debt you’re using, the total number of accounts you have and their age — are maintained by credit bureaus.
The credit bureaus — Experian, Equifax, and TransUnion — also keep track of debt-related problems you’ve had like tax liens or bankruptcy. These events can stay on your credit report for seven to 10 years.
The Consumer Financial Protection Bureau advises that you check your credit report regularly and make sure the information that the credit bureaus are collecting on you is correct. You can get a free credit report from each of the big three credit bureaus every 12 months from AnnualCreditReport.com.
If you have a problem with the credit bureaus, you can submit a complaint to the CFPB online. The Bureau will forward your issue to the company, give you a tracking number, and keep you updated on the status of your complaint.
Building a strong credit score
The CFPB also offers the following tips for building a strong credit score:
- Pay your bills on time
- Don’t get close to your credit limit — use no more than 30 percent of your total limit
- Pay off credit card balances every month — it’s a myth that you need to carry a balance to get a good score
- Only apply for credit you need. If you apply for many loans in a short period of time, lenders may think you’re having problems with your finances.
Before paying a credit repair company to help you boost your credit score, keep in mind that there’s nothing they can legally do for you — including removing wrong information — that you can’t do for yourself, Experian warns.
The cost of using a credit repair company can be considerable, ranging from hundreds to thousands of dollars — money that you may be better off spending paying down debt.
MyFico, the consumer services division of Fair Isaac Corp., creator of the FICO score, advises that “reducing the amount that you owe is going to be a far more satisfying achievement than improving your credit score.”
Stop using your credit cards, myFico advises, then use your credit report “to make a list of all of your accounts and then go online or check recent statements to determine how much you owe on each account and what interest rate they are charging you. Come up with a payment plan that puts most of your available budget for debt payments towards the highest interest cards first, while maintaining minimum payments on your other accounts.”
When making moves intended to boost your credit score, be aware that one change can affect many items on your credit report.
Closing two credit card accounts lower the number of open revolving accounts, which will generally improve your score. But it also decreases the total amount of credit, resulting in a higher utilization rate which generally lowers scores, Experian notes.
“If you have negative information on your credit reports, such as late payments, a public record item (e.g., bankruptcy) or too many inquiries, you may want to pay your bills and wait,” Experian advises. “Time is your ally in improving your credit scores. There is no quick fix for bad credit scores.”
For more helpful tips on monitoring and boosting your credit score, see “Improve your credit score and get better rates on student loan refinancing.”
Protect your credit score
When you request personalized rates from Credible, you’re authorizing a soft credit inquiry, which doesn’t affect on your credit score. Applying for a credit card, mortgage or auto loan generates a “hard inquiry” on your credit report. Multiple hard inquiries can lower your credit score (for more on this topic, see “Hard and soft credit inquiries: How to get rates without affecting your credit score“).
If you are looking to apply to multiple lenders, FICO considers inquiries in a 30-day period as “rate shopping” and counts them as a single inquiry. Some lenders offer a soft pull as a preapproval, but will ultimately need a hard pull to finish the process.
Credible is a multi-lender marketplace that allows borrowers to request competitive loan offers from vetted lenders, without affecting their credit scores.