When it comes to applying for a personal loan, your credit score can be the make-or-break factor that determines your approval, interest rate, and overall loan terms. In a financial landscape where access to credit is more important than ever—for emergency expenses, consolidating debt, or making large purchases—understanding how your credit score impacts your loan options is essential.
This comprehensive guide explores everything you need to know about credit scores and personal loans: what qualifies as a good score, the minimum score to qualify, how your credit affects loan terms, and how to build or improve your score before applying. We’ll also introduce Ava Finance, a credit-building app that helps you strengthen your credit profile using everyday bills—offering a practical way to qualify for better financial opportunities.
What Is a Credit Score and Why Does It Matter?
A credit score is a three-digit number that reflects how likely you are to repay borrowed money. It is derived from your credit report, which contains details about your payment history, total debt, types of credit accounts, length of credit history, and recent credit activity. Lenders use this number to determine your creditworthiness.
The most widely used credit score model is the FICO® Score, which ranges from 300 to 850. Here's a breakdown of FICO score ranges:
- 800–850 (Exceptional) – Lenders view you as very low-risk. You’re likely to qualify for the best loan terms, including low interest rates and high loan limits.
- 740–799 (Very Good) – You have a strong credit history and are likely to receive favorable rates and loan approvals.
- 670–739 (Good) – You’re considered a reliable borrower, and will likely qualify for a personal loan with decent terms.
- 580–669 (Fair) – Approval is possible, but you’ll likely face higher interest rates and stricter terms.
- Below 580 (Poor) – Approval is difficult, and if approved, you may face steep rates, limited amounts, and added fees.
How Credit Scores Affect Personal Loan Offers
Your credit score significantly shapes the type of personal loan offer you receive. Lenders use your score to assess risk and make lending decisions. Here’s how your score can influence the loan process:
1. Approval Odds
A higher credit score gives lenders confidence that you’re likely to repay the loan on time. Borrowers with strong credit histories are more likely to be approved without extra requirements. Those with lower scores may face rejection or be asked to provide a co-signer, additional documentation, or even collateral.
2. Interest Rates
Your credit score plays a pivotal role in determining the interest rate you're offered. Borrowers with excellent credit scores are typically offered lower APRs (annual percentage rates). This means lower monthly payments and significant savings over the life of the loan. A lower score usually leads to higher interest rates, costing you more in the long term.
3. Loan Amounts
Creditworthiness also affects the maximum amount you can borrow. Lenders are more likely to offer larger loan amounts to applicants with high credit scores because they pose less risk. On the other hand, borrowers with poor credit may only qualify for smaller loan amounts due to perceived repayment risk.
4. Fees and Conditions
Low credit scores can lead to additional fees, such as higher origination fees, prepayment penalties, or shorter loan terms. Lenders may require more stringent documentation and proof of income to offset the risk. High-credit-score borrowers often benefit from fewer or lower fees and more flexible terms.
Understanding how your score influences loan offers can help you prepare, negotiate better terms, and decide whether now is the right time to borrow or wait until you've improved your credit profile.
What’s the Minimum Credit Score to Get a Personal Loan?
There’s no universal cutoff that applies to every lender, but most use 580 as the minimum credit score for basic qualification. However, credit score requirements vary by lender and the type of personal loan being offered. Here’s a more detailed breakdown of how score ranges typically influence approval and terms:
- 300–579 (Poor) – Approval is unlikely with traditional lenders. You may need a co-signer, collateral, or look for specialized lenders that accept bad credit.
- 580–669 (Fair) – You may qualify for a loan, but you’re likely to encounter higher interest rates, lower borrowing limits, and more fees. Lenders may require more documentation to verify your ability to repay.
- 670–739 (Good) – This range is considered acceptable by most mainstream lenders. You’re more likely to receive a favorable interest rate, higher loan amounts, and standard repayment terms. You may still be asked to provide proof of stable income and a manageable debt-to-income ratio.
- 740–799 (Very Good) – You’ll generally receive competitive offers, including low interest rates, higher loan limits, longer repayment terms, and reduced fees. Lenders view you as a low-risk borrower.
- 800–850 (Exceptional) – You’re likely to qualify for the best possible terms: lowest APRs, maximum loan amounts, and minimal fees. You’ll also have more leverage when negotiating loan terms or comparing lenders.
Keep in mind, credit score is just one part of the equation. Lenders also take a close look at your:
- Income: They’ll want to verify your ability to repay the loan based on your monthly earnings. Some may require a minimum annual income.
- Employment history: A consistent work record reassures lenders that you have stable cash flow.
- Debt-to-Income (DTI) ratio: This measures how much of your income goes toward existing debt. Ideally, lenders prefer a DTI of 36% or less.
Improving just one of these factors—even if your credit score isn’t ideal—can strengthen your loan application. And if your credit score is borderline, consider waiting a few months while working to raise it. With a higher score, you may qualify for much better loan terms that can save you money over time.
Can You Get a Loan with Poor Credit?
Yes, it’s possible—but it requires extra planning, realistic expectations, and sometimes alternative strategies. Here are common solutions to help improve your approval odds when applying for a personal loan with a low credit score:
1. Use a Co-Signer
Adding a co-signer with good to excellent credit can make a significant difference. This individual essentially shares legal responsibility for the loan. If you miss a payment or default, the co-signer is on the hook. Because of the reduced risk, lenders may offer better terms, such as lower interest rates or higher loan amounts.
2. Secure the Loan with Collateral
You can apply for a secured personal loan by offering an asset as collateral—such as a car, savings account, or certificate of deposit (CD). Secured loans reduce risk for the lender, making them more accessible for borrowers with low credit. Just keep in mind that failing to repay could result in losing the asset.
3. Explore Credit Builder Tools
If you have time before applying for a personal loan, using credit-building tools can improve your credit profile. For example, Ava Finance reports your rent, phone, and utility payments to all three major credit bureaus—helping you build positive credit history without taking on new debt. Over time, these consistent payments can improve your score and boost your eligibility for loans with better terms.
Exploring these options and combining them strategically could improve your approval odds—even with poor credit.
- What Else Do Lenders Look At?
- While your credit score is a vital factor in a lender’s decision, it’s not the only element they evaluate. Lenders want a complete picture of your financial situation to determine your ability to repay. Here are additional elements that influence loan approval:
- 1. Income
- Lenders need to see that you have a stable source of income to repay the loan. This could come from full-time employment, part-time jobs, freelance work, or even retirement benefits. Expect to provide documentation like recent pay stubs, tax returns, or bank statements. The higher and more consistent your income, the more favorably you’ll be viewed.
- 2. Debt-to-Income (DTI) Ratio
- Your DTI ratio compares your total monthly debt payments to your gross monthly income. A lower DTI ratio—generally under 36%—indicates you have sufficient income to cover new debt. If your DTI is high, it signals to lenders that your budget is already stretched thin, which may limit your borrowing options.
- 3. Employment History
- Lenders look for steady employment, as it shows long-term financial reliability. While job-hopping won’t necessarily disqualify you, frequent gaps in employment or short job stints may raise concerns. A history of consistent work and career progression supports your ability to manage new debt.
- 4. Loan Purpose
- Although personal loans are often flexible, lenders may still ask about your intended use—whether it’s for home repairs, medical bills, moving expenses, or debt consolidation. Having a clear and reasonable loan purpose reassures lenders that the funds will be used responsibly, which may strengthen your application.
- Being prepared with documentation and understanding what lenders look for beyond credit score can help you submit a more compelling application and improve your approval odds.
Tips to Build Credit Before Applying
Raising your credit score before applying for a loan can improve your approval odds and unlock better terms. Here are proven ways to boost your credit health:
1. Pay Bills On Time
Your payment history is the largest factor in determining your FICO score, accounting for 35%. Even one late payment can cause a noticeable dip in your score. Make it a habit to pay all your bills—credit cards, loans, utilities, and subscriptions—on time. Setting up automatic payments or reminders can ensure nothing slips through the cracks.
2. Lower Your Credit Utilization
Credit utilization—the percentage of your available credit that you’re using—should be kept below 30%. For example, if your credit limit is $5,000, try to keep your balance under $1,500. Reducing utilization to below 10% can provide an even greater boost. Start by paying down high-interest cards first or making multiple payments per month.
3. Limit New Credit Applications
Every time you apply for new credit, a hard inquiry is placed on your credit report, which may slightly lower your score. Too many inquiries in a short time frame can signal financial distress to lenders. Instead of applying for multiple cards or loans at once, focus on one prequalified option at a time, especially when rate shopping.
4. Check Your Credit Reports for Errors
Errors on your credit reports—such as outdated accounts, duplicate debts, or incorrect payment records—can negatively impact your score. Visit AnnualCreditReport.com to get a free copy from each bureau (Experian, Equifax, TransUnion). Review thoroughly and file disputes for any inaccuracies. Correcting just one error could improve your score significantly.
5. Use Ava Finance to Build Credit with Bills
Ava Finance is a credit-building app that helps you grow your score by reporting payments you're already making—like rent, utilities, and phone bills—to all three major credit bureaus. Unlike traditional credit-building methods that often involve taking on debt, Ava gives you a low-risk way to boost your credit history using your regular household expenses. It’s ideal for first-time borrowers, credit rebuilders, or those without access to credit cards.
These strategies won’t just improve your loan eligibility—they’ll also help build long-term financial confidence and stability.
No Credit Score? You Still Have Options
If you’re new to credit or haven’t used it in a while, you might not have a credit score. This can make qualifying for loans difficult—but there are alternative ways to start building credit:
1. Become an Authorized User
Ask a trusted family member or friend to add you as an authorized user on their existing credit card. When they maintain good credit habits—like making on-time payments and keeping balances low—it reflects positively on your credit report. You won’t need to use the card or even have access to it to benefit.
2. Use Ava Finance to Establish a Score
Ava Finance offers a practical way to build credit from scratch by reporting everyday bills—like rent, utilities, and mobile phone payments—to all three credit bureaus. Since many traditional credit products can be hard to access without a score, Ava bridges that gap with no credit check required and no risk of adding debt.
3. Apply for a Secured Credit Card
A secured credit card requires a cash deposit that acts as your credit limit. These cards are easier to get approved for and work just like regular credit cards. As you make timely payments, your issuer reports the activity to credit bureaus, helping you build a credit history. Many users eventually graduate to unsecured cards.
These strategies offer a low-barrier entry into the credit system. By starting small and staying consistent, you can build a strong foundation for future financial opportunities—including personal loans with better terms.
How Rate Shopping Affects Your Credit
When you're planning to take out a personal loan, comparing multiple offers is not only smart—it’s essential to securing the best deal. But many borrowers worry that multiple inquiries might damage their credit score. Fortunately, credit scoring models have built-in protections for rate shopping, so you can explore your options without fear.
FICO Score: 45-Day Safe Shopping Window
FICO, the most commonly used credit score model by lenders, allows for multiple inquiries to be treated as a single inquiry—provided they occur within a 45-day window. This means you can apply with several lenders, compare interest rates, and choose the best loan terms without a major impact on your credit score. The FICO model understands that consumers shop around and doesn’t penalize them for being financially prudent.
VantageScore: Shorter 14-Day Window
VantageScore, another widely used credit scoring model, has a shorter 14-day window. Within this period, multiple loan applications are also counted as one inquiry. If you’re unsure which model your lender uses, it’s safest to complete all your rate shopping within a two-week window.
Soft Inquiries and Prequalification
A great way to compare loan options without affecting your score at all is to use prequalification tools. These rely on soft credit inquiries, which don’t show up on your credit report and don’t impact your score. Many lenders offer this feature on their websites, allowing you to preview interest rates, terms, and loan amounts before formally applying.
Prequalification is especially helpful for borrowers with fair or poor credit who want to assess their chances before committing to a hard inquiry. Once you’ve identified a favorable offer, you can proceed with confidence.
Pro Tip: Be Strategic
When rate shopping:
- Keep all formal applications within a 14- to 45-day period.
- Use prequalification whenever possible.
- Monitor your credit report before and after applying to catch errors or suspicious activity.
Rate shopping empowers you to make informed borrowing decisions and reduce long-term costs. Done correctly, it won’t hurt your credit—it’ll help you find the most cost-effective path forward.
Final Thoughts: Build Smarter Credit with Ava Finance
Your credit score is a powerful financial tool that directly impacts your access to personal loans. Whether you’re just getting started or trying to improve your score, taking proactive steps can make a big difference.
Ava Finance helps you build credit in a modern, accessible way—without needing to open a credit card or take on debt. By reporting your everyday bills to all three major credit bureaus, Ava helps strengthen your credit profile and sets you up for success when applying for personal loans or other financial products.
Start building smarter credit today at www.meetava.com.
