Credit Score FAQs 2022

 

What is a Credit Score?

• What is a credit score?
  A credit score is a number that summarizes the historical credit information on a credit report. The number reflects the likelihood that you will become delinquent on a loan or a credit obligation in the future.

• What is VantageScore®?
  VantageScore is a credit score developed jointly by Experian, Equifax and TransUnion. This score uses the same formula across all three credit reporting agencies, resulting in a more accurate and consistent picture of your credit history. 

• Why don't I have a credit score?
  Credit scoring models cannot generate a score without enough credit information. If you have little or no credit history, you probably will not have a credit score available.

• What are score factors?
  Score factors or score factor codes are provided with a credit score to explain how items in your credit report influenced the score. These codes can help you understand which items had the greatest impact.

• How often do credit scores change?
  Your credit score changes as your credit report changes. Therefore, it can change often since new information is added to your credit report all the time.

Credit Range — What is a good score?

• What is the credit score range?
  There are many different credit scores with differing ranges. As a result, it is possible for two different scores to represent the same level of lending risk. When you request a credit score from Experian, you will receive not only a score, but also an explanation of what the number represents in terms of how lenders will view your creditworthiness. If you have a good Experian credit score, you likely will have a good score with lenders, even if the number is different.

• What is the score range for VantageScore®?
  VantageScore 3.0 has a familiar score range of 300 to 850, where the higher the score, the lower the credit risk. While each lender determines their own risk categories, for the U.S. population, the following general credit tiers can be identified by these score ranges:

        Credit Tiers                                 VantageScore 3.0

  Super Prime                                    781-850

  Prime                                               661-780

  Near Prime                                      601-660

  Subprime                                         500-600

  Deep subprime                              300-499

  
  
  Keep in mind that there are many different credit scores in the market and the score range will vary by model

• What is a good credit score?
  Because there are many different credit scoring systems with different scales, a "good" credit score depends on the scoring system used by your particular lender. However, you can get a very good idea of whether you have a "good" credit score by getting a credit score and report from Experian. If you have a "good" credit score from Experian, you likely will have a "good" credit score with your lender.

• Is there just one credit score?
  One of the most common myths about credit scores is that there is only one credit score. Web sites or financial advisers who claim there is only one "real" credit score either are misinformed or are being misleading. In fact, there are many different credit scores used by lenders (according to some estimates, more than 1,000), although some scores are used more than others.

How is my Credit Score determined?

• What information goes into calculating a credit score?
  Credit scores use information from three key areas of your credit report: account information (such as credit cards, auto loans, student loans, mortgages and rent), public records (such as judgements or bankruptcies) and inquiries (requests by lenders to view your credit). Information such as race, gender, where you live and marital status are not used in credit scores.

• Who calculates credit scores?
  Credit scores may come from several sources. Lenders may request that a credit score be provided along with your credit report. Credit reporting agencies provide the service of applying the credit scores from a number of credit score developers. Lenders specify which credit score they want delivered with the credit report. Credit scores may also be calculated by mortgage reporting companies that compile your credit reports from each of the national credit reporting companies and then deliver the combined reports and scores to the lender. Lenders may also apply their own, proprietary scores after receiving your credit report.

What affects my Credit Score?

• Will I be penalized for shopping around for the best interest rate?
  Too many inquiries may have a negative impact on your credit score. However, most recently developed credit scores recognize when a consumer is shopping for the best rates and either ignore multiple inquiries or count them as only one inquiry if they occur within a specific period of time. In such cases, shopping around will have little or no impact on a credit score.

• Do lenders and creditors look at all three credit reporting agency reports and credit scores calculated using information from each report before approving a credit or loan application?
  Not always. Most mortgage lenders will look at reports from all three credit reporting agencies and credit scores calculated using information from each, but other lenders may use reports and scores from two or just one of the credit reporting agencies.

• Do inquiries for preapproved offers affect a credit score?
  No. Only applications for credit initiated by the consumer will affect your score. Inquiries into your credit for account review purposes as well as preapproved offers of credit have no effect on credit scores.

• Do finance companies have a negative impact on a credit score?
  The presence of a loan finance account can negatively affect your score because these accounts often carry high interest rates which may hamper your ability to repay and which many lenders view negatively. However, when paid on time, these accounts can also have a positive effect on your score (if the loan helps you to make your payments in a more timely fashion, for example).

• Why does Experian need to see my marketing offer?
  The privacy of consumers is important to Experian. That's why we take extra care in certain areas we consider sensitive. This sensitive data might include, but is not limited to children's data and ethnic data. Our goal is to partner with you to ensure that consumers continue to benefit from our sharing of data for marketing purposes.

• Does having too many credit cards affect a credit score?
  Having too many credit cards with either high balances or large amounts of credit available can negatively impact risk scores, depending on the overall credit history.

• If my spouse had bad credit before we were married, will that affect a credit score?
  If you hold a joint credit account, have cosigned a loan or have authorized use of another person's credit, these items could affect a score if they appear on your credit report. It's important that joint account holders or authorized users understand that their credit behavior does affect the other joint account holder or main account holder.

  A credit account held solely in the name of your spouse, your child or any other family member cannot impact your credit score. However, in community-property states, all debt acquired during a marriage is considered a joint debt, regardless if the account is joint or in the name of an individual spouse.

• Does cosigning for a loan affect a credit score?
  Absolutely. By cosigning, you are accepting full responsibility for the debt if the other person does not pay as agreed. A cosigned account will appear on both your credit history and the other person's. All loans and credit card accounts that appear on your credit report will impact credit scores.

• Do late payments affect a credit score?
  Paying bills on time is generally the single most important contributor to a good credit score. Being late on any bill, for any length of time, is a possible indication of future nonpayment of debt and is almost always viewed negatively by lenders. Any late payments will remain on your credit report for up to seven years.

• Does renting or leasing a home affect a credit score in any way?
  Yes, because your rental payment history is now part of your standard credit report, it may be incorporated into certain credit scores, such as VantageScore® and FICO^® Scores^☉ .

  This will allow many who previously didn't have a credit history to become scoreable for the first time and begin building and rebuilding credit through the responsible payment of rent.

• Do inquiries affect a credit score?
  Inquiries placed on your credit report when you apply for new credit can impact your credit score. However, inquiries have a relatively small impact on your credit score. In a credit scoring model, there are stronger indicators of future payment performance, such as past payment history and use of credit. Inquiries are rarely, if ever, the only reason for poor credit scores. They become significant only if there are other issues already lowering your score, such as late payments or very high debt.

• Does every inquiry affect a credit score?
  Anytime your credit report is pulled—including when you order a copy of your credit report directly from the credit reporting agency—an inquiry is added to your report. Inquiries made when you applied for credit cards or loans, called hard inquiries, are counted in a credit score. Inquiries made by companies making promotional offers of credit or your lender conducting periodic reviews of your existing credit accounts, called soft inquiries, do not affect your credit score. Soft inquiries also occur when you check your own credit report or when you use credit monitoring services from companies like Experian.

  When you request your credit report directly from Experian, it shows you all inquiries. This is done so you know who has been looking at your credit. Some inquiries on your report are accompanied by a description of why the report was pulled.

How does my Credit Score affect my ability to get credit?

• Can I use a credit score as leverage for a lower interest rate when seeking a loan or line of credit?
  It is never a bad idea to work with issuers and lenders to reduce your interest rate. You definitely have more leverage if a credit score puts you in the low-risk range. However, because there are many different credit scores, the model used to calculate the score you obtain, and the score itself, may be different than the one the lender uses in making its decision. For instance, you may get a generic credit risk score from Experian, but an auto lender might use its own custom scoring model with a different scale. Consequently, the numbers won't be the same but will likely represent a similar level of risk.

• Who or what decides if I get my loan?
  Banks, credit card companies, auto dealers, retail stores and other lenders decide if you get your loan. Most businesses that issue credit or loans use credit scores to quickly summarize a consumer's credit history, saving the need to manually review an applicant's credit report and providing a better, faster decision. Although many additional factors are used in determining whether or not you receive the credit you applied for — such as an applicant's income versus the size of the loan — a credit score is a leading indicator of one's basic creditworthiness. Credit reporting agencies do not make lending decisions.

How to Pay Off Credit Card Debt

 

Using credit cards regularly can be a great way to build your credit history and take advantage of rewards and benefits along the way. But overspending and unexpected financial challenges can result in a mountain of credit card debt.

You can start paying off your credit card debt by tallying up how much you owe and listing the balance and interest rate for each card. Once you have an idea of what you're dealing with, here are a few different strategies you can use to start paying down your credit card debt.

Credit Card Debt Repayment Strategies

There are several different ways you can tackle your credit card debt. And depending on your credit situation and budget, some may be better than others. Here's a quick summary of your options that could help you decide which path to pursue.

Debt Consolidation Loan

A debt consolidation loan is essentially a personal loan you use to pay off credit card debt. Unlike credit cards, personal loans are installment loans that have a set repayment schedule and fixed monthly payment amount. Debt consolidation loans can help you secure a lower interest rate and also simplify your repayment process by replacing multiple monthly payments with just one.

On average, personal loans have lower interest rates than credit cards. But your rate will depend on your credit score and other factors, so there's no guarantee you'll get a lower rate than what you're currently paying. If your credit is fair or poor, you could face high interest rates or difficulty qualifying for a personal loan. Fortunately, many lenders allow you to get prequalified before you apply. This process requires just a soft credit check, which doesn't impact your credit score, and allows you to compare loan offers with your current situation.

If you're considering a personal loan to pay off debt, make sure the new monthly payment fits within your budget. If it's too high or on the border, it may be difficult to keep up, and a missed payment could hurt your credit. You also need to commit to not running up balances on those cards again—otherwise you could end up in worse shape than when you took out the loan.

Balance Transfer Credit Card

If your credit is in good shape, another option might be to apply for a balance transfer credit card. These cards typically come with a low or 0% APR for a set period of time, with some promotions offering an interest-free period of a year or longer.

During the introductory period, you pay no interest on the balance you transfer from another credit card, although you could pay a transfer fee that's typically 3% or 5% of the amount you transfer.

If you're able to pay off the entire balance by the end of the introductory period, you can avoid paying any interest charges. And even if you can't completely pay it off in time, pay as much as possible every month toward the balance and you could still save yourself hundreds of dollars.

If you have multiple balances, consolidating them with a balance transfer can also simplify your monthly payments.

However, it's important to understand the limitations of balance transfers. The promotional APR is often only for the amount you transfer, and a higher interest rate may apply to any new charges you make using that card. Some promotional offers do include both balance transfers and purchases, so review the terms carefully.

Also, there's no guarantee you'll get a high enough credit limit on the new card to cover the amount you want to pay off. Maxing out the balance transfer card could result in your credit score going down, at least temporarily, until you can pay it down and reduce your credit utilization. Your credit utilization—your balances divided by your credit limits—plays an important role in your credit scores.

Finally, keep in mind that a late or missed payment may cause you to lose the introductory rate, and after the introductory period ends, the interest rate on the unpaid balance can jump significantly.

If you qualify for a balance transfer card and are motivated to pay off your balance as soon as possible, the savings may be worth it.

Debt Snowball Method

If you've had trouble with overspending and think taking out a new loan or credit card to pay off your balances could tempt you to rack up even more debt, the debt snowball method might be a better approach.

With this method, you make minimum payments on all your cards every month and apply any extra payments you can make toward the credit card with the lowest balance. When that card is paid off, you take what you were paying to the first card and apply it to the one with the next-lowest balance. You keep doing this with each card until they're all paid in full, with your growing payments on each new card having a snowball effect.

The debt snowball approach is best for people who need wins early to stay motivated. Even if your lowest balance is just a few hundred dollars, paying it off could help you stay focused on your goal.

Debt Avalanche Method

Like the debt snowball strategy, the debt avalanche method has you focus on knocking out accounts one by one. The key difference is the avalanche method has you focus on paying off your balances with the highest interest rates first.

Compared with the debt snowball method, the debt avalanche method may not give you early wins. For example, if the card with the highest APR also has a high balance, it can take a long time before you pay off the first credit card. But it could help you save more money by eliminating your most expensive debts first.

Debt Management Plan

If your credit is in bad shape, a debt consolidation loan or balance transfer card may not be an option for you. And if your budget is too tight for extra payments under the debt snowball or avalanche method, a debt management plan may be an option to consider.

A debt management plan is a repayment plan you can enter into with help from a credit counseling agency. A credit counselor will notify your creditors that you're using a debt management plan and will typically try to negotiate lower interest rates and monthly payments.

Debt management plans typically take three to five years, depending on how much you owe and your ability to pay. They can be a great way to avoid debt settlement and bankruptcy, both of which can be effective but will damage your credit significantly. Your card issuers may choose to close your accounts, which could hurt your credit, but not by much when compared with the credit damage that can result from your other options.

Debt management plans aren't expensive, either, but expect to pay a modest upfront and ongoing monthly fee throughout the plan's term. Contact a reputable credit counseling organization to find out whether this might be a good option for you.

If your only alternatives are debt settlement and bankruptcy, a debt management plan can save your credit score and potentially save you money.

Tips for Paying Off Credit Card Debt

As you consider your options for paying off your debt and try to find the most effective way to achieve your goal, here are some tips to help you make it happen.

Create a Budget and Stick to It

The more money you can pay toward your credit card debt each month, the faster you'll eliminate what you owe.

If you don't already have a budget in place, start by writing out your average income and expenses over the past few months. Categorize each of your expenses to get an idea of exactly where your money is going. Then you can pinpoint areas where you can cut back and repurpose those dollars for debt reduction.

If you're living paycheck to paycheck, this step can be tough. Even if it's just a few dollars extra a month, though, it can make a difference in the long run. Do what you can to create a budget and continue looking for opportunities to earn or save more in the future.

Work to Lower Your Bills and Day-to-Day Expenses

At first glance, you may not be sure where you can cut back in your budget. But with a deeper dive, you may be able to find some opportunities. Start with your recurring bills. For example, if you have multiple streaming services but don't use one or two very often, consider cutting them temporarily until you've paid off your debt.

Also, take a look at your car insurance premiums and shop around to see if you can get the same coverage with another insurance company for less.

In addition to those regular bills, take a look at how you spend your money every day. If you tend to go out for lunch during the week instead of bringing something from home, making that small change can free up a lot of cash flow.

Again, remember that you don't necessarily need to change your lifestyle and spending habits permanently. But making small temporary changes now can put you in a better financial position in the future.

Find Ways to Make Extra Cash on the Side

There are several different ways you can make money, even from the comfort of your home. Here are some of the more common ways to increase your cash flow:

• Take on more hours at your current job.
• Ask for a raise.
• Take a second job.
• Look for temporary or odd jobs on job boards.
• Turn something you're good at into a side business.
• Sell some of your personal belongings that you no longer need.

In addition to these, there are several other ways you can earn a little extra money each month to help pay down your debt. Take time to consider which approach works best for you based on your situation.

Consider Nonprofit Credit Counseling or Financial Assistance

Credit counseling agencies do a lot more than just create debt management plans. If you're having a hard time making heads or tails of your debt situation, a credit counselor can help.

For example, they can review your debt situation, help you create a budget, explain your options, review your credit report with you and also provide some educational courses. Many agencies do all of this for free.

If your financial situation is dire, you may also consider seeking financial assistance. This may come in the form of rent relief, food stamps, legal aid and other assistance programs from federal and state agencies, as well as nonprofit organizations. You can use the 211 network to find programs in your area.

Should You Close a Credit Card After Paying Off Debt?

Even if you manage to tackle your debt swiftly, it can feel like you're spinning your wheels if you're adding more to your balances each month. Consider putting a moratorium on your current credit card spending while you focus on eliminating the balances. Instead of canceling the accounts, however, consider keeping them in a safe location where you don't have convenient access to them.

When you cancel a credit card account, it can potentially hurt your credit scores by reducing your overall credit limit. This can impact your credit utilization, which makes up 30% of your FICO^® Score^☉ .

If you cancel a card with a high credit limit and have high balances on your remaining cards, even if you pay them in full each month, it could increase your credit utilization and negatively impact your credit scores.

On the flip side, if your card has an annual fee or a security deposit attached and you don't plan to use it, it may be worth it to cancel and save money or get your deposit back. You can also consider downgrading your credit card to one without an annual fee.

If you decide to hold on to the cards you no longer plan to use, try to use them occasionally (and pay them off immediately) to keep the accounts active. Otherwise, your card issuer may choose to close down the account for you, which they can do without notice.

Learn How to Use Your Credit Responsibly in the Future

After you reach your goal of paying off your credit card debt, it's important to be proactive about developing good credit habits to avoid ending up in the same situation again.

This includes:

• Sticking to your budget to avoid overspending.
• Paying off your balance on time and in full every month.
• Avoiding racking up a high balance.
• Taking advantage of credit card rewards and benefits to add more value to your everyday spending.

It's also a good idea to check your credit score regularly to know where you stand at all times. This can also help you spot potential issues that could hurt your credit, so you can address them quickly. In addition to your credit score, make sure you also frequently review your credit reports, which give you a deeper understanding of what's affecting your credit score.

Take the First Step

Regardless of how much you owe, the task of paying off your credit card debt can feel daunting. But the sooner you take the first step toward your goal, the easier it will be and the faster you'll achieve it.

Keep in mind, too, that your strategy may change over time as your financial situation changes. Be willing to evaluate your plan regularly and make adjustments as needed. Paying off credit card debt can take months or even years, but the effort is well worth it.

What Is a Personal Loan?

 

A personal loan is a type of loan that allows flexible use, short- to moderate-term repayment options and relatively quick funding. Whether you're trying to consolidate high interest debt, start a business or pay an expensive medical bill, a personal loan can help you accomplish your goal.

But a personal loan can be expensive compared with other types of debt, and it may not be the best option for every situation. Here's what to consider before you apply.

What Is a Personal Loan Used For?

Personal loans—sometimes called debt consolidation loans, signature loans or unsecured loans—offer a lot of flexibility in how you can use them.

In most cases, personal loans are unsecured, which means you don't need to put up collateral to get approved. There are, however, secured personal loans, which require you to use a savings account or another asset as collateral in case you default.

Personal loans typically come with fixed or variable interest rates, as well as repayment terms that range from just a few months to up to seven years—though some can go longer.

With most lenders, you have a lot of leeway for how you can use your personal loan funds. That includes things like:

• Debt consolidation (especially for credit card debt)
• Medical bills
• Home repairs and renovations
• Repaying family or friends
• Wedding expenses
• Divorce costs
• Moving expenses
• Funeral costs
• Vacations
• Furniture or appliance purchases
• Small business expenses
• Holiday shopping

Keep in mind, though, that some lenders may have restrictions on how you can use your money. Some may prohibit education-related expenses, for instance. Check with the lender beforehand to make sure you can use a personal loan for your intended purpose.

When Is a Personal Loan a Good Idea?

While it's possible to use a personal loan for just about anything, that doesn't mean it's always wise to do so. In general, it's a good idea to use a personal loan when it can improve your financial situation or provide necessary funds. Examples include:

• Debt consolidation: If you have high interest credit card debt, you may be able to save money by paying it off with a lower interest personal loan. Even if you don't necessarily save money on interest, a personal loan can provide a structured repayment term, which can help if you're struggling to stay motivated in paying off your debt.
• Home renovations: If you want to make some improvements to your home, a personal loan may be a better choice than a home equity loan or line of credit because it doesn't come with the threat of losing your home if you default.
• Emergency expenses: In an ideal world, you'd have enough money set aside for emergencies. But life isn't always ideal, and if you lose your job, your car breaks down or a major home appliance needs to be repaired or replaced, a personal loan can provide some peace of mind at a stressful time.
• Personal events: Weddings, divorce and funerals can be expensive, and it's not always possible to save up for such a major life event. In these instances, a personal loan can provide much-needed funds at the right time.

While it's possible to use a personal loan for things like vacations and expensive consumer goods, it's best to save up until you can pay for these expenses with cash (or charge them on a credit card to get the points and then pay them off immediately).

How to Compare Personal Loans

Just as with any other financial product, it's important to shop around and compare several personal loan options before applying for one. Even if you get an offer from your primary bank or credit union, it's possible you could find a better deal elsewhere.

Here are the different features to consider while you're comparing personal loans:

• Interest rate: A loan's interest rate represents the cost of borrowing money. The average personal loan interest rate is 9.41%, according to Experian data. However, your rate offers may be higher or lower based on your credit and financial situation. You should find out how personal loan interest rates work before getting one to ensure that you know how much you will pay for the loan in total.
• Loan term: Different lenders offer varying repayment terms, and how long you have to repay a debt impacts your monthly payment. If one offers you three years to repay a debt and another offers only two years, your monthly payment could be significantly higher with the second option—but you might also save on interest with the shorter-term loan.
• Fees: In addition to interest, some lenders charge fees that could increase your annual percentage rate (APR). Origination fees, for instance, are deducted from your loan funds before you receive them, and some lenders also charge late fees and prepayment fees if you pay off your loan early.
• Funding time: Some lenders offer next-day or even same-day funding, while others can take several days to deposit the funds into your checking account. Depending on how soon you need the money, consider these timelines.
• Other features: Not all lenders provide added features, but some may allow you to get a lower interest rate if you set up automatic payments or have an existing relationship with the bank. Others may offer forbearance options if you lose your job.

Many personal lenders allow you to get prequalified with a rate offer before you officially apply. This process typically requires a soft credit check, which won't impact your credit score. This process can allow you to compare loan options side by side and pick the best fit for you.

How to Qualify for a Personal Loan

Personal loans are available for most consumers across the credit spectrum, but there are some things you can do to improve your chances of getting approved at a favorable rate. Here are some factors lenders consider when you apply:

• Credit score: Your credit score is a snapshot of your overall credit history, and the higher it is, the better your chances of getting approved with a low interest rate. That said, there are personal loans for bad credit, so you're not completely out of luck if you don't have time to improve your credit before you apply. Find out more about getting a debt consolidation loan with bad credit.
• Income: Your ability to repay the debt is another major factor, and lenders will specifically consider your debt-to-income ratio—that's how much of your gross monthly income goes toward debt payments. A low ratio means you're more likely to be able to afford your loan payments because there aren't too many competing debts.
• Credit report: While your credit score is important, lenders will also check your credit report to make sure there aren't any negative items from the past that could affect their decision. Specifically, things like delinquent payments, collection accounts, bankruptcy and foreclosure could act as a red flag and make it difficult to get approved.

If your credit and income situation isn't where you want it to be for a personal loan, work to improve it before you apply.

Start by checking your credit report to pinpoint areas you need to address, and also work on paying down debt to reduce your debt-to-income ratio. This process can take time, but it can save you a significant amount of money if it can help you qualify for a lower interest rate.

Do Your Homework

A personal loan can help you cover necessary expenses and improve your debt situation. But it's important to consider both the benefits and drawbacks before you apply. It's also essential that you take the time to shop around and compare different options before applying for one.

As you research lenders, check out Experian CreditMatch™, which can provide loan offers from multiple lenders in one place with just a few details from you. This can help you save time as you research and narrow down your list of potential lenders.

How to Refinance a Personal Loan?

 

How to Refinance a Personal Loan

You can refinance a personal loan through a traditional bank, credit union or online lenders. You can even refinance your loan with the same bank if they allow it. If you're ready to refinance your personal loan with your current bank or another lender, follow these six steps:

1. Determine How Much Money You Need

Make sure your new loan has a borrowing limit high enough to pay off your current loan. Remember, your lender may charge a prepayment penalty, and your new loan may come with an origination fee, both of which you should account for when you run your numbers. You'll want to ensure any penalties and fees don't negate the benefits of refinancing.

2. Review Your Credit Report and Credit Score

Before you start shopping for a new loan, consider getting your credit report and credit score to find out where your credit stands. Keep in mind, lenders typically advertise the lowest rates—the ones they reserve for borrowers with the best credit. You may not receive the advertised rate if your credit score is less than exceptional.

3. Shop and Compare Rates and Terms

Prequalify with multiple lenders to see the personal loan rates and terms that may be available to you. Prequalifying allows you to compare loan offers without affecting your credit score. Make sure your comparisons are apples-to-apples for the same loan amount and repayment term and take into account any applicable loan fees.

4. Submit Your Application

Once you single out a loan offer as the best for your needs, fill out an application and provide any requested supporting documents, such as your personal identification, Social Security number, pay stubs and account statements.

If a bank or credit union approves your personal loan, you should receive the funds within one to five days. Many online lenders fund your loan as soon as the same day or the next business day.

5. Pay Off Your Existing Loan

While your lender may transfer the personal loan funds to your account, other lenders may pay off your original loan on your behalf. You may qualify for interest rate reductions for opting to have the lender directly pay off your loan, so check your terms carefully before making a decision. Remember to check your account to confirm the first loan is closed and no balance or additional fees remain.

6. Make Payments on Your New Loan

When you receive funds for the new loan, your repayment period begins. It's a wise practice to set up automatic payments to ensure you never miss a payment.

Can You Refinance a Personal Loan? 2022

 Quick Answer

You can refinance a personal loan by replacing it with a new loan, preferably with a lower interest rate. After you qualify for a new personal loan, use the proceeds to pay off your existing loan.

One of the main reasons borrowers take out personal loans is to pay off high-interest debt with a lower interest rate loan. Along the same lines, you might consider refinancing your current loan if you find a loan offering you a lower interest rate.

You can refinance a personal loan by prequalifying for a new loan, submitting an application and using the funds to pay off your old loan. Understanding the advantages and disadvantages of personal loan refinancing and how it might affect your credit can help you decide if it's a good option.

When Should You Consider Refinancing a Personal Loan?

You may wonder how soon you can refinance a personal loan. Generally, you can refinance a personal loan once you start making payments. But be sure to check your current loan's terms for any restrictions preventing you from refinancing.

Deciding whether to refinance a personal loan will likely depend on your unique financial situation. Weigh the following pros and cons of personal loan refinancing to help decide if you should replace your current loan with a new one.

Pros of Refinancing a Personal Loan

Like refinancing any loan, choosing to refinance your personal loan comes with some advantages.

• Save on interest. If your credit score is higher than when you first applied for your personal loan, you may qualify for a lower interest rate. Doing so could help you save money over the life of the loan so long as you keep the same repayment term.
• Change your repayment term. Refinancing into a new loan with a longer repayment term could lower your monthly payments and make them more manageable. Conversely, if you can afford the higher payments, refinancing to a shorter loan term could save you money in interest charges overall.
• Get a larger loan. Can you refinance a personal loan for more money? Yes. Depending on your credit, you may qualify for a personal loan with a higher borrowing limit, potentially up to $100,000.
• Stabilize your interest rate. If your current personal loan has a variable interest rate, market fluctuations can cause your rates to rise or fall. You could avoid unpredictable rates by switching to a personal loan with a fixed interest rate that remains the same over the life of the loan.

Cons of Refinancing a Personal Loan

Of course, refinancing isn't for everyone. Consider the following disadvantages of personal loan refinancing before you sign on the dotted line.

• You may incur a prepayment penalty. Check with your existing loan's terms to determine if your lender will penalize you for paying off your loan balance early.
• The new loan may come with an origination fee. Many lenders charge an origination fee ranging from 1% to 8% of the loan amount to process your loan. These fees are deducted from your loan amount, so make sure there are enough funds left over to pay off your first loan.
• You could pay more interest over time. While extending your loan term can help you lower your monthly payment, you could end up paying more money in interest over the life of the loan.
• It could impact your credit score. When you apply for a new loan, your lender will likely pull your credit, which counts as an inquiry on your credit report. Hard inquiries can temporarily drop your credit score by five points or less.

How to Refinance a Personal Loan

You can refinance a personal loan through a traditional bank, credit union or online lenders. You can even refinance your loan with the same bank if they allow it. If you're ready to refinance your personal loan with your current bank or another lender, follow these six steps:

1. Determine How Much Money You Need

Make sure your new loan has a borrowing limit high enough to pay off your current loan. Remember, your lender may charge a prepayment penalty, and your new loan may come with an origination fee, both of which you should account for when you run your numbers. You'll want to ensure any penalties and fees don't negate the benefits of refinancing.

2. Review Your Credit Report and Credit Score

Before you start shopping for a new loan, consider getting your credit report and credit score to find out where your credit stands. Keep in mind, lenders typically advertise the lowest rates—the ones they reserve for borrowers with the best credit. You may not receive the advertised rate if your credit score is less than exceptional.

3. Shop and Compare Rates and Terms

Prequalify with multiple lenders to see the personal loan rates and terms that may be available to you. Prequalifying allows you to compare loan offers without affecting your credit score. Make sure your comparisons are apples-to-apples for the same loan amount and repayment term and take into account any applicable loan fees.

4. Submit Your Application

Once you single out a loan offer as the best for your needs, fill out an application and provide any requested supporting documents, such as your personal identification, Social Security number, pay stubs and account statements.

If a bank or credit union approves your personal loan, you should receive the funds within one to five days. Many online lenders fund your loan as soon as the same day or the next business day.

5. Pay Off Your Existing Loan

While your lender may transfer the personal loan funds to your account, other lenders may pay off your original loan on your behalf. You may qualify for interest rate reductions for opting to have the lender directly pay off your loan, so check your terms carefully before making a decision. Remember to check your account to confirm the first loan is closed and no balance or additional fees remain.

6. Make Payments on Your New Loan

When you receive funds for the new loan, your repayment period begins. It's a wise practice to set up automatic payments to ensure you never miss a payment.

How Refinancing a Personal Loan Affects Your Credit

Refinancing your personal loan can impact your credit score in a couple of ways:

• Hard inquiries: When you refinance your personal loan, the lender performs a hard check of your credit report, which can negatively influence your score. As mentioned above, the dip in your score is usually minor and temporary. It's worth noting, when you shop for a single type of loan within a specific time frame, like 14 days, the credit scoring companies may count your applications as a single inquiry for score calculating purposes. When multiple inquiries take place within a short time—14 days for VantageScore and 45 days for FICO^® Score^☉ —the scoring models know you're comparison shopping and count it as one individual inquiry.
• Length of credit history: How long you've managed open credit accounts makes up 15% of your FICO^® Score. This scoring factor includes the age of your oldest account, how long it's been since you've opened an account and the average age of all your accounts. If your personal loan represents one of your oldest accounts, refinancing it may negatively affect your credit score by decreasing the length of your credit history and the average age of your accounts.

The good news is you may recover your original credit position by making consistent on-time payments on your new loan.

Should You Consider Refinancing Your Personal Loan?

A personal loan refinance may be worth pursuing if the new loan leaves you in better financial shape. Run the numbers and make an apples-to-apples comparison with your current loan and any new loan you're considering. If the new loan can reduce your interest charges, make payments more affordable or shorten your loan term, refinancing may make sense.

If the loan offers you receive have higher interest rates than your current loan, you might consider pausing your refinancing efforts to improve your credit. Then, you can refinance when your credit score is higher and you're eligible for more attractive rates. That said, rising interest rates due to economic factors could make a refinance unattractive even if you have a high credit score. One way to potentially raise your FICO^® Score instantly is by using Experian Boost^®ø. This feature gives you credit for responsibly paying bills like your phone, utilities and streaming services. It also gives you access to your free Experian credit report and FICO^® Score.

What Affects Your Credit Scores?

 

Do you feel like you need an advanced degree to figure out what is affecting your credit score? Good news is you don't—it can actually be rather simple.

Behind the number itself (credit scores typically range from 300 to 850), there are five main factors used to calculate credit scores. Lenders use those scores to figure out how likely you are to pay back your debt—thus those scores are often the deciding factor in whether you will get a new loan.

As your financial profile changes, so does your score, so knowing what factors and types of accounts affect your credit score gives you the opportunity to improve it over time.

Top 5 Credit Score Factors

While the exact criteria used by each scoring model varies, here are the most common factors that affect your credit scores.

1. Payment history. Payment history is the most important ingredient in credit scoring, and even one missed payment can have a negative impact on your score. Lenders want to be sure that you will pay back your debt, and on time, when they are considering you for new credit. Payment history accounts for 35% of your FICO^® Score^☉ , the credit score used by 90% of top lenders.
2. Amounts owed. Your credit usage, particularly as represented by your credit utilization ratio, is the next most important factor in your credit scores. Your credit utilization ratio is calculated by dividing the total revolving credit you are currently using by the total of all your revolving credit limits. This ratio looks at how much of your available credit you're utilizing and can give a snapshot of how reliant you are on non-cash funds. Using more than 30% of your available credit is a negative to creditors. Credit utilization accounts for 30% of your FICO^® Score.
3. Credit history length. How long you've held credit accounts makes up 15% of your FICO^® Score. This includes the age of your oldest credit account, the age of your newest credit account and the average age of all your accounts. Generally, the longer your credit history, the higher your credit scores.
4. Credit mix. People with top credit scores often carry a diverse portfolio of credit accounts, which might include a car loan, credit card, student loan, mortgage or other credit products. Credit scoring models consider the types of accounts and how many of each you have as an indication of how well you manage a wide range of credit products. Credit mix accounts for 10% of your FICO^® Score.
5. New credit. The number of credit accounts you've recently opened, as well as the number of hard inquiries lenders make when you apply for credit, accounts for 10% of your FICO^® Score. Too many accounts or inquiries can indicate increased risk, and as such can hurt your credit score.

Types of Accounts That Impact Credit Scores

Typically, credit files contain information about two types of debt: installment loans and revolving credit. Because revolving and installment accounts keep a record of your debt and payment history, they are important for calculating your credit scores.

• Installment credit usually comprises loans where you borrow a fixed amount and agree to make a monthly payment toward the overall balance until the loan is paid off. Student loans, personal loans, and mortgages are examples of installment accounts.
• Revolving credit is typically associated with credit cards but can also include some types of home equity loans. With revolving credit accounts, you have a credit limit and make at least minimum monthly payments according to how much credit you use. Revolving credit can fluctuate and doesn't typically have a fixed term.

How Does Having Different Accounts Affect My Credit Score?

Credit mix—or the diversity of your credit accounts—is one of the most common factors used to calculate your credit scores. It is also one of the most overlooked by consumers. Maintaining different types of credit accounts, such as a mortgage, personal loan and credit card, shows lenders you can manage different types of debt at the same time. It also helps them get a clearer image of your finances and ability to pay back debt.

While having a less diverse credit portfolio won't necessarily cause your scores to go down, the more types of credit you have—as long as you make on-time payments—the better. Credit mix accounts for 10% of your FICO^® Score and could be an influential factor in helping you achieve a top score.

Can Service Accounts Impact My Credit Score?

Service accounts, such as utility and phone bills, are not automatically included in your credit file. Historically, the only way a utility account could impact a credit score was if you didn't make payments and the account was referred to a collection agency.

Through the new platform, users can connect their bank accounts to identify utility and phone bills. After the user verifies the data and confirms they want it added to their credit file, they will receive an updated FICO^® Score instantly. Late utility and telecom payments do not affect your Boost score—but remember, if your account goes to collections due to nonpayment, that will stay on your credit report for seven years.

What Can Hurt Your Credit Scores

As we discussed above, certain core features of your credit file have a great impact on your credit score, either positively or negatively. The following common actions can hurt your credit score:

• Missing payments. Payment history is one of the most important aspects of your FICO^® Score, and even one 30-day late payment or missed payment can have a negative impact.
• Using too much available credit. High credit utilization can be a red flag to creditors that you're too dependent on credit. Credit utilization is calculated by dividing the total amount of revolving credit you are currently using by the total of all your credit limits. Lenders like to see credit utilization under 30%—under 10% is even better. This ratio accounts for 30% of your FICO^® Score.
• Applying for a lot of credit in a short time. Each time a lender requests your credit reports for a lending decision, a hard inquiry is recorded in your credit file. These inquiries stay in your file for two years and can cause your score to go down slightly for a period of time. Lenders look at the number of hard inquiries to gauge how much new credit you are requesting. Too many inquiries in a short period of time can signal that you are in a dire financial situation or you are being denied new credit.
• Defaulting on accounts. The types of negative account information that can show up on your credit report include foreclosure, bankruptcy, repossession, charge-offs, settled accounts. Each of these can severely hurt your credit for years, even up to a decade.

How to Improve Your Credit Score

Improving your credit score can be easy once you understand why your score is struggling. It may take time and effort, but developing responsible habits now can help you grow your score in the long run.

A good first step is to get a free copy of your credit report and score so you can understand what is in your credit file. Next, focus on what is bringing your score down and work toward improving these areas.

Here are some common steps you can take to increase your credit score.

1. Pay your bills on time. Because payment history is the most important factor in making up your credit score, paying all your bills on time every month is critical to improving your credit.
2. Pay down debt. Reducing your credit card balances is a great way to lower your credit utilization ratio, and can be one of the quickest ways to see a credit score boost.
3. Make any outstanding payments. If you have any payments that are past due, bringing them up to date may save your credit score from taking an even bigger hit. Late payment information in credit files include how late the payment was—30, 60 or 90 days past due—and the more time that has elapsed, the larger the impact on your scores.
4. Dispute inaccurate information on your report. Mistakes happen, and your scores could suffer because of inaccurate information in your credit file. Periodically monitor your credit reports to make sure no inaccurate information appears. If you find something that's out of place, initiate a dispute as soon as possible.
5. Limit new credit requests. Limiting the number of times you ask for new credit will reduce the number of hard inquiries in your credit file. Hard inquiries stay on your credit report for two years, though their impact on your scores fades over time.

What to Do if You Don't Have a Credit Score

If you want to establish and build your credit but don't have a credit score, these options will help you get going.

• Get a secured credit card. A secured credit card can be used the same way as a conventional credit card. The only difference is that a security deposit—typically equal to your credit limit—is required when signing up for a secured card. This security deposit helps protect the credit issuer if you default and makes them more comfortable taking on riskier borrowers. Use the secured card to make small essential purchases and be sure to pay your bill in full and on time each month to help establish and build your credit. 
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• Become an authorized user. If you are close with someone who has a credit card, you could ask them to add you as an authorized user to jump-start your credit. In this scenario, you get your own card and are given spending privileges on the main cardholder's account. In many cases, credit card issuers report authorized users to the credit bureaus, which adds to your credit file. As long as the primary cardholder makes all their payments on time, you should benefit.