Before you think about taking out a loan, you need to get familiar with your credit rating. The amount you will have to pay every month on your loan, and even whether you can get a loan at all, depend on whether or not you have good credit.
Your credit rating is a measure lenders use to rate how big a risk they are taking by lending money to you. Borrowers with good credit ratings can get loans with lower interest rates and lower payments. People with credit ratings that aren't so strong may have to pay much more in interest and other fees – that means higher loan payments and less money going to you and more to the lender.
What goes into your credit rating?
- Your credit history – Have you repaid past loans on time? Have you ever declared bankruptcy? Issues like these are a big factor in your credit rating. To get an idea of your credit history, order copies of your credit report from the three national credit bureaus – Experian (800-997-2493), Equifax (888-397-3742) and Trans Union (800-888-4213).
- Your employment history – Do you change jobs often, or have you had the same job for awhile? Lenders consider people who stay in their jobs for a long time to be less risky borrowers.
- Your current debt – If your debt is already high compared to your income, creditors might consider it risky to lend you even more.
- Your collateral – If the equity you have in your home is much larger than the loan you want, then lending to you isn’t very risky.
- Your cash on-hand – Your credit rating is stronger if you can pay loan closing costs in cash.
If you have a weak credit rating, it's a good idea to hold off on borrowing and take some time to build up a stronger rating so you can qualify for a loan with better terms, a lower interest rate and lower payments. Sometimes that means doing something as simple as just letting some time pass – for example, records of late payments, and even bankruptcies, are eventually removed from your credit reports. Talk to a credit counselor about what you can do to build a strong credit rating.
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