Your credit score reflects how well you handle your finances and may impact your ability to purchase or lease a car, purchase or lease a home, or even get a job. If you are facing an uncertain future in 2020 due to COVID-19, or if you want to improve your financial situation, now is the time to lower monthly payments and get your finances in order. One of the best ways to prepare for the future is to lower your credit score to the extent you can. A personal loan is an installment loan with no collateral, which can help your credit in several ways:
(1) A personal loan can lower your utilization ratio on revolving credit. You can use your personal loan funds to pay off credit cards and pay your lender each month for your personal loan.
(2) A personal loan can balance the mix of your types of debt (your credit mix accounts for 10% of your FICO score).
Many credit experts recommend that even if you do not have an installment loan already (car loan, student loan, other personal loans), consider getting a small personal loan to build a healthy credit mix.
(3) If you do have high-interest debt, a personal loan can help you pay off your debt faster by allowing you to pay less in interest and more in principal.
(4) A personal loan can give you a payment history, which accounts for 35% of your FICO score. If you have a history of missed or late payments or accounts in collections, a demonstrated history of payments made will improve your credit score over time.
Note: It should go without saying that while a personal loan can benefit your credit situation, you should not get a personal loan to spend money, such as for a vacation. Use funds responsibly to pay down higher-interest debt and save for luxury purchases or vacations. If you are paying high-interest rates on credit cards or payday loans, an installment loan with a lower APR will save you money over the long run. The more principal you can pay each month, the faster you will pay down your debt.
Find the Best Option For You
Not all loans are alike, and you should read the fine print of the loan being offered to make sure it works for you, especially in 2020, when people are facing financial crises and uncertain futures due to the COVID-19 pandemic. Loan solutions offered as quick and easy may really be expensive.
For example, U.S. Bank offers a “U.S. Bank Simple Loan” as a quick and convenient solution to individuals facing financial crises. However, the fine print says, “Simple Loan is a high-cost-loan and more affordable options may be available.” Look even closer and see that the total cost to borrow (annual percentage rate) is 35.65%. That rate falls just a hair below the 36% cap consumer advocates, and financial experts recommend lenders put on APRs. With careful research, you will be able to find a personal loan suitable for you that will benefit your financial future!