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- It may be possible to get a loan even if your credit scores aren't where you would like them to be
- Checking your credit reports and credit scores may help you get an idea of what lenders may see
- If your credit situation stems from a job loss, illness or other circumstances, you can add a 100-word statement to your credit reports to explain
If you’re applying for credit and your credit scores aren’t as high as you would like them to be, you may wonder how your situation may affect your chances of being approved for a loan.
Simply put, there is no one answer. Everyone’s credit and financial situation is different, there are many different credit scoring models (ways to calculate credit scores), and different lenders have their own lending criteria.
Here are some steps you can take if you are concerned low credit scores might hurt your chances for approval for a loan or line of credit:
1. Check your credit reports.
The purpose of checking your reports regularly is threefold – ensure that all the information on your credit reports is accurate and complete, check for any activity that may signal potential fraud or identity theft, and understand your current situation before you start applying for credit, giving you an idea of what lenders and creditors may see once you apply. You’re entitled to a free copy of your credit reports from the three nationwide credit bureaus (Equifax, Experian and TransUnion) every 12 months by visiting www.annualcreditreport.com. It may also help to check your credit scores and understand how credit scores are calculated, keeping in mind there are many different credit scoring models, or methods of calculating credit scores.
You can create a myEquifax account to get two free Equifax credit reports each year. In addition, you can click “Get my free credit score” on your myEquifax dashboard to enroll in Equifax Core Credit™ for a free monthly Equifax credit report and a free monthly VantageScore® 3.0 credit score, based on Equifax data. The credit score provided is not a credit score that lenders are likely to use, but is educational and intended to give people a general idea of their credit standing.
2. Learn your debt to credit and debt to income ratios.
Your debt to credit ratio is the amount of revolving credit you’re currently using compared to the total amount available to you. Revolving credit accounts include things like credit cards and lines of credit. They don't have a fixed payment each month, and you can re-use the credit as you pay the balance down. To calculate your debt to credit ratio, add up the amount you owe on revolving credit accounts and divide it by your credit limits. For instance, if you owe a total of $5,000 on two credit cards, both with a $10,000 credit limit, dividing $5,000 by $20,000 gives you a .25, or 25 percent.
Your debt to income ratio is how much debt you have compared to your income, usually expressed as a percentage. To calculate it, add up your total recurring monthly debt -- credit card payments, rent or mortgage payments, vehicle loan payments, and any others. Divide that by your gross monthly income -- the amount you make each month before taxes, withholdings and expenses. For instance, if you have $2,000 in debt each month, and you make $6,000 in gross monthly income, you have a debt to income ratio of 33 percent; that is, you spend 33 percent of your monthly income on your debt payments.
Your debt to credit ratio may be one factor used to calculate your credit scores, depending on the credit scoring model. Other factors may include your payment history, the length of your credit history, how many credit accounts you've opened recently and the types of credit accounts you have. Your debt to income ratio doesn't impact your credit scores, but may be one factor lenders evaluate when deciding whether to approve your credit application.
3. Consider adding a consumer statement to your credit reports.
Perhaps your credit situation was affected by a job loss, illness or other circumstances. You can add a 100-word consumer statement to your credit reports to explain. The statement will be part of your credit reports when they are pulled by potential lenders and creditors.
4. Speak to different lenders.
Think about getting educational information from different lenders can help you understand their general qualification terms for a loan or line of credit, so you can know what it might take for you to qualify. You may not want to apply for loans at this point, so you can avoid hard inquiries, which may negatively impact credit scores, on your credit reports.
5. Learn about your loan options.
Different types of loans have different eligibility requirements. You may want to consider both secured and unsecured loans. A secured loan, such as a home equity line of credit, is tied to an asset you own. If you don’t pay the loan as agreed, your asset could be subject to repossession. An unsecured loan is not tied to an asset. You could also consider getting a co-signer for a loan.
6. Be cautious.
Consider avoiding “credit repair” organizations promising a “quick fix” for your credit scores, as well as loans with high fees or interest rates and short loan terms. These types of loans may worsen your credit situation.
It may be possible to obtain a loan with low credit scores. Remember that adopting responsible credit behaviors, such as paying your bills on time, every time, may make potential lenders and creditors more confident when you apply for credit in the future.