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The First Thing to Do Before Applying for a Personal Loan

Gerri Detweiler

Are you thinking about getting a personal loan for debt consolidation, to make some repairs around the home, or perhaps to pay for an unexpected expense such as dental work? Before you start shopping for a personal loan, there’s one essential step you don’t want to skip — checking your credit score.

While federal law entitles you to a free copy of your credit report each year from each of the three major credit reporting agencies at AnnualCreditReport.com, you are only entitled to a free credit score from the borrower if you are turned down (or charged more) for credit or insurance. (In addition, you can get a simple, easy to understand overview of your credit, as well as your credit scores, with Credit.com’s free Credit Report Card).

There are a couple of reasons why it’s so important to get your credit score before you apply for a personal loan:

  1. You won’t waste time or further hurt your credit. There is no point in applying for loans for which you don’t qualify. If you do, you’ll not only get frustrated but you’ll also create unnecessary inquiries into your credit reports, which can drop your credit scores.
  2. You’ll be better prepared to avoid personal loan scams. If your credit scores are very low, then you’re a prime target for companies that promise loans to people with bad credit, but instead rip them off. We’ve heard from consumers who have lost hundreds, even thousands, of dollars to advance fee loan scam artists. You don’t want to be one of them. If you know going into the process that your credit scores are low, then you should be extra careful to check out any companies that offer you a loan.

What to Look For

Believe it or not, the number you see when you review your credit score is not the most important thing on which to focus. Instead, try to understand what areas that make up your score are strong, and what need some work. Our Credit Report Card, for example, assigns a grade to each of the main factors that go into a score:

  • Payment History
  • Debt Usage
  • Credit Age
  • Account Mix
  • Inquiries

If you earn a “C” or “D” in any of those areas of your Credit Report Card, for example, then you’ll want to figure out what you can do to change those grades. While you may not be able to change your scores quickly, especially if the information is accurate, over time you may be able to work on those factors so your scores get stronger. Of course, if you discover that there are mistakes that are causing your scores to be lower than they should be, disputing those mistakes may help. Your credit reports and scores can change as soon as those mistakes are corrected. And when that happens, you may be able to get a lower rate on the personal loan you’re trying to secure.

Keep in mind that lenders very likely use different scoring models than the one used to create the credit score you’ve obtained. That’s nothing to stress about. It just means that you should focus on the general factors affecting your scores, rather than a specific number.

When you do shop for a personal loan, see if you can learn any information about what kinds of credit scores the lender requires. Some lenders will publish that information on their website, for example. Again, the goal here is to avoid applying for loans for which you won’t qualify.

Finally, steer clear of lenders that require upfront fees before they will give you a loan. They may tell you that you need to purchase “credit insurance,” which lenders are not allowed to require as a condition of the loan. Or they may tell you that you need to make the first few payments upfront. That money will go to the scammer who promised the loan. You you’ll wind up with no loan, and poorer for the experience.

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