Nowadays it is rather easy to successfully apply for a Personal Loan in USA. The process is simple, quick and more often than not, you get the money within a day or two either in the form of a cheque or as a direct credit to your account.

The only thing that you need to be wary about while applying for a personal loan is your credit score. That actually has the capability to literally make or break a deal. Because personal loan is somewhat a high-risk transaction for a lender (owing to the absence of any collateral), most of them prefer the borrower to have a clean past record. Now if you have been a defaulter in loan repayment before, the chances are that your loan application would be rejected summarily for your low credit score. So, this is indeed an important parameter and you need to be absolutely sure that you sit tight on the right side of the scale.

If you have met a financial expert, you must be familiar with his/her continuous insistence on building and maintaining an excellent credit. But at times, these advices tend to be either too vague or too technical for a layman. In order to take your score to the next level, you need to be fully aware of what the credit score entails.

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Now the question arises that what exactly does credit score means?

This score is basically a triple digit number that summarises the information of your own credit report, which documents every detail of how you have handled borrowed money in the past. This score serves as a basis for the lender to evaluate the risk of letting you borrow money from their entity. The score enables a lender to objectively gauge the credit risk in an unbiased manner. They have been a huge improvement to the earlier process which was disastrously slow and unfairly biased.

The most familiar usable credit scoring formulation applicable in the United States of America discovered by Fair Isaac Corporation or simply FICO scores have a range starting nearly from 300 to 860. The main thing to look in this score is the getting a high score and if you do it your credit report will get better. However, there is no universal parameter as to what a good credit score is. Every lender or financial institution has its own standard for determining what they can consider a good score. But according to the prevalent general trends, a score of 300-629 is considered as bad score, 630-689 can be called an average score, 690-719 range makes for good credit and beyond that is the range for an excellent credit score.

In order to maintain a fair enough score, it is absolutely essential that you pay your bills in time, take loans responsibly and never fail to pay the EMIs or mortgages. The less liable you are, the better your scores.

The various advantages of having a good credit score are:

Faster Loan Processing time: Because the scores are delivered rapidly, the financial institution can actually process your loan application in a matter of minutes. Even a time-consuming application like that of a mortgage can be done in a few hours for borrowers whose score is satisfactorily higher than the cut-off predetermined by the lender. You can also be awarded instant credits based on this score.

Fairer Decisions: There is no place for personal relations or feelings when the loan is approved on the basis of the score. This actually helps to reduce discrimination against religion, race, castes, gender and nationality.

Room to Improve: With the right kind of strategies, there are ample opportunities to improve your credit score, no matter how bad your credit history has been in the past. A good payment pattern at present can help nullify the past defaulting issues.

Credit Availability: Armed with precise information, a lender is at liberty to approve more loans and identify potential borrowers who would be high risks. It also gives the lenders confidence to offer more credit to a large number of people with good records, as they have a fair understanding of the risk they are taking.

Lowering overall credit rates: Because of the availability of more credits to the lender, the actual rate of interest borne by the borrower decrease significantly and the score streamlines the operation of granting loans, saving time and money. A recent survey shows that mortgage rates are much lower in the US than in Europe because the borrowers’ financial history is completely available to the lenders. This can also lead to significant lowering of interest rates levied on you.

However, the FICO score is not without its own share of criticism. In order to have a score and consequently apply for a loan, it is essential that you have an account reporting to a credit documenting agency (for example, a credit card, mortgage or auto loan). Not only that, you must be active on that account, i.e. the account must have some kind of balance. Currently, as reported by Forbes, about 53 million people are currently not scored, because they do not have active accounts that report to a bureau. This is somewhat unfair, as potentially, many of these people can use a debit card, maintain a steady savings account and pay their bills in time. Yet, they cannot apply for a personal loan without a score.

Another notable criticism is that in order to get a credit score, people apply for a credit card and in the long run, they end up using it more than they can actually cough up – pushing them deep in debts and invariably lowering their scores.

Nonetheless, in the absence of a better grading system, Your FICO score serves as one of the most important parameters that help you to acquire a loan or a credit. It also plays an important factor in determining the interest levied on you. So spend responsibly and keep your credits in check. You never know how that may come in handy.

Image courtesy of Stuart Miles at FreeDigitalPhotos.net


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