What credit score a loan needs

There is no single credit score that qualifies for a loan. Lenders publish ranges and price within them, so a score that earns a prime rate at one lender may earn a near-prime rate at another. What matters is the tier you land in and the total repayable that tier produces. The lowest rates are only available to the most qualified applicants.

There is no single cutoff

Lenders do not publish a pass mark. They publish a rate range and a set of underwriting rules, and they price within that range according to the file in front of them. Two applicants with the same score can receive different offers.

The practical consequence is that a score below the prime tier is not a refusal. It is a repricing. The loan may still be available, at a higher rate and often with a larger down payment or a cosigner requirement.

How lenders tier by score

Lenders group scores into bands and attach a rate range to each band. The best band gets the advertised rate, and each lower band gets a higher one. The bands and the rates differ by lender and by product.

Because the bands differ, the same file can land in a better tier at one lender than another. That is the reason to compare offers rather than accept the first rate quoted.

Source: Freddie Mac Primary Mortgage Market Survey, published at freddiemac.com/pmms. These are national averages for conforming loans. What you are quoted depends on your credit profile, points paid, loan amount and property.

The published rate backdrop

Freddie Mac publishes the national average mortgage rate every week, and the table above shows the latest six readings. It is the benchmark for secured, conforming borrowing, and consumer loan rates are typically priced above it because they are unsecured.

The published average is not the rate you will be offered. It is the market reference against which your tier is priced, and the gap between the two is the cost of your credit file.

What the score is made of

Payment history and amounts owed carry the most weight in the common scoring models. Length of credit history, the mix of accounts and recent new applications make up the rest, in varying proportions.

A missed payment is the most damaging single item, and its effect fades with time. High utilisation on revolving accounts is the second most common drag, and it can be reduced quickly by paying balances down.

Score models differ

Different scoring models produce different numbers from the same credit file. A score from one bureau or model is not the score a lender will use, and a mortgage score can differ from a card score.

That is why a free consumer score can disagree with a lender's decision. The consumer score is a guide, and the lender's model is the one that prices the loan.

What raises a score fastest

Paying down revolving balances lowers utilisation, which is the fastest lever for most files. Making every payment on time protects the largest factor, and correcting a reporting error can remove a drag entirely.

Time is the other factor. Negative items age and matter less, and a longer history helps, so the score often improves simply by waiting while doing nothing wrong.

• Bring every account current before applying anywhere.
• Pay revolving balances down to lower utilisation.
• Check your reports and dispute errors in writing.
• Avoid new applications while the file is being repaired.

What a lower score costs

A lower tier raises the annual rate and can raise the fees. On a large balance over a long term, the difference in total repayable can exceed the amount borrowed, which is the real cost of the tier.

The tier can also reduce the approved amount, because the lender caps the payment at a level the file supports. A smaller approval plus a higher rate is the combination that pushes borrowers toward longer terms.

Thin files and no-score applicants

A thin file with little history is not the same as a damaged file. Some lenders assess rent, utility and bank data instead, and a secured card or a credit-builder loan can start a history.

A cosigner can bridge the gap, at the cost of putting the cosigner's file and full liability on the line. That should be a deliberate agreement, not a formality.

Shopping without wrecking the file

Each application usually triggers a hard inquiry, but rate shopping within a short window is commonly treated as a single inquiry by the scoring models. Ask the lender how it reports and keep the window tight.

Use pre-qualification where it is offered, because it normally uses a soft inquiry that does not affect the score. Pre-qualification is an estimate, but it narrows the field before a hard application.

When to apply now anyway

If the loan funds something that cannot wait, such as a car needed for work or a medical bill, applying now may be the right call even at a higher tier. The alternative is doing without, and that cost may exceed the interest.

If the loan is discretionary, waiting while the file improves is usually cheaper. The rate difference between tiers persists for the whole term, so a few months of repair can pay for itself many times over.

A checklist

Check your reports, correct errors, bring accounts current and pay down revolving balances. Then pre-qualify with several lenders, compare total repayable rather than rates, and apply within a short window.

Confirm the amount received after fees, the term and the prepayment terms before signing. A score gets you into a tier; the contract terms decide what you actually pay.

Sources for every figure on this page

Related reading

• Credit repair costs
• Personal loan costs
• Affordability calculator
• Loan payment calculator