Why Your Credit Score Matters So Much When Getting a Personal Loan

Want to lock in a competitive interest rate on a personal loan? You'll need good credit.

The upside to getting a personal loan is that you can use that money for any reason you want. If you have credit card debt you want to pay off more affordably, you can take out a personal loan at a lower interest rate and knock out your balances. Or you can take out a personal loan to:

• Go on vacation
• Finance emergency repairs
• Furnish your house

But if you're going to take out a personal loan, it's important that you have a good credit score at the time of your application. Here's why.

Your score could be your most valuable asset

When you take out a mortgage, that home loan is secured by the asset it's being used to finance -- your home. If you don't repay your mortgage, your lender can force the sale of your home in order to get repaid. The same applies to an auto loan. Fall behind on your payments, and your lender can have your car repossessed and sold to fulfill your loan obligation.

Personal loans work differently, though. Personal loans are unsecured loans, which means they're not tied to a specific asset. If you don't make your personal loan payments, there's no asset your lender can force you to sell in order to get its money back.

For this reason, personal loan lenders can be pretty picky about the candidates they approve. And they tend to favor applicants who come in with strong credit scores.

The higher your score is, the more likely you'll be to not only get approved but also snag a competitive interest rate on a personal loan. To be clear, it is possible to qualify for a personal loan if your credit score isn't as strong, but you might get stuck with a high interest rate that makes the loan a lot less affordable.

How to boost your credit score

If you're looking to apply for a personal loan but you're not thrilled with what your credit score looks like, it pays to work on boosting it before submitting that application. You can do so in a number of ways:

• Pay your bills on time, which will lend to a more favorable payment history. Your payment history carries more weight than any other factor when calculating your credit score.
• Pay off some existing credit card debt. Doing so will bring down your credit utilization ratio, which is another major factor that goes into determining your score. That said, if you're in a position where you need to take out a personal loan, you may not have the means to pay off the debt you already have.
• Check for credit report errors. If there are mistakes that are working against you, getting them corrected could improve your score quickly.

If you're applying for a personal loan, a good credit score could make it easier to get approved and snag an affordable interest rate. Check your credit score before applying to take out a personal loan so you don't wind up disappointed.