Credit Basics for Personal Loans

You may be able to change your interest rate if your contract is set up that way. Terms vary by provider so to find out if this is possible, talk to a professional to see if the change is allowed. Although this may be an option, if you are looking to lower your interest rate or monthly payment, refinancing your loan might be your best option.

Credit bureaus do not approve you for a loan, but they do provide lenders with copies of your credit report. This is what most lenders use to base their decision on for whether they are going to grant you credit or not. Credit bureaus do not make the decision for the lenders. It is up to that lender to decide what the acceptable criteria is for them.

A lien holder is the institution (usually a bank) that has the right to take and hold or sell the property of a debtor as security or payment for a debt borrowed from them.

APR stands for Annual Percentage Rate. The APR on a loan includes the costs involved in securing the loan such as the interest rate, points and other related fees you will be paying annually. The APR is meant to provide you with a rate to use when comparing loans.

A revolving loan is one that is automatically renewed upon maturity.

An installment loan is one that you pay at a certain specified rate. Example: Monthly, weekly, bi-weekly, annually.

Home equity is the difference between the market value of your home and the amount you have paid towards that value.

A home equity line of credit is a form of revolving credit in which your home is used as collateral.

While both are considered second mortgages, with a home equity loan all funds will be paid at closing. A home equity line of credit provides you with a credit line that you can borrow against where your home is used as collateral.

Debt consolidation involves combining outstanding debts into one debt, which often can result in lower monthly payments.

The main purpose of debt consolidation is to put you on a road to paying off your debts at a faster rate while at the same time, making lower monthly payments. Using a debt consolidation plan usually helps improve your credit as well, since most creditors report payments received under this type of loan as prompt payment.

Bankruptcy is the term that describes the court proceedings a person must go through to relieve the debts they are unable to pay their creditors.

A lender figures your credit score (FICO score) by taking your credit history and measuring it against a database of habits in the general borrowing population. That, in turn, determines whether your tendencies match those of borrowers who default on debt, declare bankruptcy or find themselves in various types of financial difficulties.

When determining how high a credit score will be, the following five characteristics typically separate good credit from not-so-good credit:

• Late payments in the past. People who have failed to make timely payments in the past are more likely to do the same in the future.
• How you have used your credit in the past. If you have one or more credit cards that are maxed out or close to it, you are more of a risk than a person who has a high limit but is not anywhere close to using it up.
• The length of your credit history. People who have had credit for a long time generally pose less of a borrowing risk.
• The number of times you have applied for credit. The number of times you have applied for loans, credit cards or other debt instruments may count against you when wanting to receive yet another loan.
• The number of different types of credit you have. Someone with a combination of installment and revolving loans is generally less risky than someone who has only a secured credit card.

Credit scores are a number roughly between 300 and 800. A number higher than 660 will almost guarantee a consumer a loan. Anything between 620 and 660 is not bad either, but a consumer may need to convince the lender that a loan to them would be worth it. If a credit score is below 620, receiving a loan may be difficult.

Of course, exceptions are sometimes made if the credit report has incorrect, incomplete, or not enough information on it. An unusual event, such as a job loss or extended sickness, may excuse borrowers as well, depending on the lender.

If you are looking for a loan, credit card, or low interest rates, having good credit will increase your chances of getting one of these. If you have credit problems, it may be hard to acquire a loan when you need it the most.

The trick is to start small: try applying for credit with a local business, such as a department store, local bank or credit union. Before you apply for credit, you may want to make sure the creditor reports credit history information to one of the major U.S. credit bureaus so you can build your history. You may also want to apply for a credit card, use it once, pay the entire balance and then tear it up.

If you are having difficulty opening a credit account include asking a friend or family member to cosign your loan or credit card application. You may also want to apply for a secured card, which is guaranteed by a deposit you make to the card issuer.