How do banks use credit scores?

When you apply for a personal loan, your lender will pull one of your credit scores from at least one of the credit reporting agencies — Experian, Equifax, or TransUnion. At that point, they will take a close look at your score to determine your creditworthiness.

“Credit scores are used to determine the risk of doing business with an applicant,” said credit expert John Ulzheimer. “If your score or scores are good enough and you have a sufficient income, then you’re likely to be approved.”

Keep in mind, however, that your credit score is only one factor a lender will consider when deciding whether to approve you for a personal loan.

“Banks also look at your entire credit report, your debt-to-income ratio (DTI), employment history, any items you own that can be used as collateral, and so on,” said Beverly Harzog, credit card expert and consumer finance analyst for U.S. News & World Report.

In summary, you will likely need to have more than a sufficient credit score for a personal loan if you hope to qualify. You will also need to have a proof of income and employment, an acceptable debt-to-income ratio (a DTI below 35 percent is a good goal to shoot for), and a solid credit history that shows you have used credit responsibly in the past.

What credit score is needed for a personal loan?

When it comes to minimum credit score requirements for personal loans, there is no hard and fast rule. According to myFICO.com, a credit score of 670 or above is generally considered “good” and acceptable. This means that an applicant who applies for a personal loan with a score of 670 may qualify, but they may or may not receive the best interest rate or terms.

But that doesn’t mean a consumer with a credit score of 620 can’t get a loan, said Harzog; “it just means that the interest rate will be high.”

That’s because, generally speaking, those with low credit scores usually pay much higher interest rates if they can qualify for a loan. However, the opposite is also true since a high credit score will usually get you a loan with the lowest interest rates and best terms.

How much will your interest rate vary based on your credit score? That depends on your lender, where you live, and other factors. For example, at Wells Fargo, a $5,000 personal loan with a repayment period of sixty months offers the following rates based on a calculator they offer on their website as of November 14, 2018:

• Excellent credit (score of 760 or above): 11.49% to 13.74%
• Good credit (score of 700 to 759): 11.49% to 18.49%
• Fair credit (score of 621 to 699): 18.49% to 24.49%
• Poor credit (score of 620 or below): 19.99% to 24.49%

In terms of transparency, not all lenders offer the type of detail Wells Fargo does with their loan payment calculator. While some lenders list their credit score requirements online, others remain vague or refuse to commit to a minimum credit score cutoff altogether.

For example, Goldman Sachs Bank USA lists that only consumers with “excellent credit” qualify for their personal loans with the lowest rates, but they don’t list a minimum credit score requirement or explain their minimum cutoff for a great credit score. On the other hand, student loan refinance company and personal loan lender Earnest lists directly on their website a minimum credit score requirement of 680.

If you’d like to explore personal loan options, you can use this tool from LendingTree to see offers from up to five different lenders. You’ll input information about yourself and what you want out of a loan. If you qualify, the tool with spit out lender offers you can review.

As you begin comparing lenders for a personal loan, it’s important to keep in mind that credit score requirements, interest rates and transparency about internal processes will vary greatly. Ulzheimer also said that requirements also vary by lender since some “target a higher risk population.”

“For some lenders, a 580 may be good enough,” he said. “It’s not uniform.” (You can see personal loans for bad credit here.)