Dreaming of a new home, car, or a big purchase? Look no further than your credit score – it might be the key to your next big milestone. Though they might seem like an afterthought, lenders take credit scores into account to evaluate loan applications, impacting interest rates, loan terms, and even approval decisions. But exactly how do lenders use credit scores? Read on to learn more about how these rates are used and how lenders might weigh them in your loan approval process.
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How do lenders use credit scores?
Lenders obtain credit reports just like consumers do, from the three major credit bureaus. These reports, as borrowers can see, contain information about an individual’s credit history, including payment history, credit utilization, and types of credit used. Lenders analyze these reports to assess creditworthiness.
Different credit score models, such as FICO® Scores and VantageScore, are used to generate a credit score. FICO® Scores models are used by 90% of lenders. These models weigh various factors differently, but generally, they prioritize factors like on-time payment history, the amount of available credit a borrower is using (credit utilization), length of credit history, having a variety of credit accounts, and any recent credit inquiries.
Automated decision-making for lenders
Lenders increasingly rely on automated systems to quickly assess loan applications based on credit scores and other relevant data. These systems utilize algorithms to analyze borrowers’ credit reports (and other information) to determine loan eligibility, interest rates, and loan terms. However, the technology is still new, and the Consumer Financial Protection Bureau (CFPB) emphasizes that consumers are entitled to thorough explanations of loan rejections by companies. This is because automated decision-making is still in its infancy and mistakes can occur.
How credit scores impact loan applications
Oftentimes, lenders use different types of FICO® Scores for different varieties of loans. When it comes to mortgages, many lenders end up guaranteeing loans with Freddie Mac or Fannie Mae for the safety of their consumers. These are government sponsored entities (GSEs) meaning that those who qualify for these mortgages have to align their protocol with GSE guidelines. They currently use older FICO® Scores 2, 4, or 5, though this might change at the end of 2025. These scores weigh your liquid assets a little higher, to determine if you can still pay your mortgage in worst-case financial scenarios.
Auto loans tend to use FICO® Auto Scores. These scores assess your ability to pay your loan back on a car more than other FICO® Scores. Borrowers with higher scores typically qualify for lower interest rates, reducing the overall cost of the vehicle. And if you’ve ever had trouble paying for a car in the past, you might have difficulty qualifying for an auto loan.
Personal Loans, including both secured and unsecured loans, tend to use FICO® Scores 8 or 9. These are the generalized FICO® Scores, which encompass general creditworthiness. You’ll be able to check this score when you get your free annual credit check. Individuals with lower scores may find it difficult to qualify for unsecured loans altogether.
Using credit scores beyond just interest rates
Lenders can use credit scores to determine interest rates, but that’s not all. A low credit score can lead to the outright denial of a loan application, regardless of the loan type. Furthermore, even if approved, borrowers with lower scores may face less favorable loan terms – this could include shorter loan terms, which increase monthly payments, and more stringent requirements, such as larger down payments or higher insurance premiums.
Improving your credit score
If you’re concerned about your credit score impacting your changes of loan approval, there are a few actionable steps you can take to try to improve it. Make payments on time consistently and keep your credit utilization as low as possible. Maintain a credit mix of different types of credit while limited many new credit applications within a short window of time. And if you feel like you’re doing all these things and still find yourself lost in your credit journey, don’t be afraid to investigate credit monitoring tools such as MyFICO to help get your credit back on track.
