Personal Loans and Credit Score: What to Know Before Signing on the Dotted Line
There are a number of reasons to consider taking out a personal loan. Maybe you need some emergency cash, maybe you need some money to get your business off the ground, maybe you heard that using a personal loan can actually help to improve your credit. Whatever your reasoning, you're going to need a credit card, and hopefully your credit is in good enough shape to get you a low APR%.
"Oh I don't need to worry about that, I found a lender who doesn't need to run a credit check." No, you've found a payday lender, not a personal loan.
Here's what you need to know before signing on the dotted line:
What Exactly Is A Credit Check?
A credit check is a look at your financial history that includes identifying information such as names, past addresses, known employers and so on, as well as credit history itself. Credit history means bank accounts, credit card accounts, loans, and all of the pertinent information therein. So a credit check tells people how long a loan has been out, whether or not you've defaulted on a loan and so on. You'll also see public records, so evictions, tax liens and bankruptcies will all go in to determining your credit score.
What is Required for a Credit Check?
In order to run a credit check, you'll need all the information on your photo ID. If you're having a check run on someone else, you'll also need their permission. The easiest way to check your own credit score by requesting a free copy of your credit report from Equifax, Experian or TransUnion.
How are FICO Scores Assigned?
The letter grades handed out on FICO scores are assigned in a straightforward manner:
760-850 -- A+
700-759 -- A
660-699 -- B
620-659 -- C
580-619 -- D
Less than 580 -- F
What Exactly Is FICO?
FICO is short for Fair Isaac Corporation. FICO is a publicly trade company offering financial institutions the opportunity to look potential customer's credit score. FICO scores can go as low as 300 or as high as 800, with the average "good" rating, for most industries, being somewhere in the 650 range.
What Will My APR% Look Like?
This will vary from person to person, from lender to lender, from loan to loan. In general, the best you can get is something like 2.75% to 3.50% for A+ credit on a 48 month loan, and up to 6.00% for the same loan with C credit. Extend that loan out to, say, 60 months, and your A+ rate hasn't changed yet, but a C rated borrower may be paying as much as 20.00% APR.