Credit bureaus collect all your information regarding your outstanding credit. They record any defaults, past dues, how many times you are late, what your outstanding balances are and how long you have had a credit history. They use this information to determine your credit score.
Scores can range anywhere from 400 at the low end and up to 840 for the high.
Your credit score will have a direct impact on your approval, term, and rate for a personal loan. A bank may require that you open a checking or savings account and have your payments auto-drafted if your credit score is not high enough. Or they may turn you down altogether just based on your credit score.
All banks have a certain criteria that must be met for personal loans. Even if you have sufficient income to cover the loan payments, if your credit score is not within the criteria, you may be turned down. If you are in the lower end – say 600 to 650 you may be offered a shorter term and a higher rate. If you are in the mid range you will get a better rate and term than the lower tier but not as good as the highest credit tier. If you are in the highest credit tier, 700 and above, you can expect to be eligible for the lowest rate possible and best terms. But you may need to ask for them.
Knowing what your credit score is can make a huge difference when it comes time to negotiate for credit of any kind. Banks don’t always come right out and give you the best terms they can, the higher your interest rate, the more money they are making. So know what your score is in order to get the best possible deal.
If a bank feels that you are not credit-worthy enough on your own, a bank may condition your loan saying that you will need a co-signer. Or they may ask that you secure the loan with some type of collateral. Banks do this to protect themselves. If you have defaulted on loans or been late with payments in the past, they can see all that on your credit report and from your credit score, they can add these conditions to your loan to help protect themselves in case you do not pay them as agreed. Your credit score affects almost everything you do in life now but nothing more than applying for a loan.