Can a Loan to Pay off Credit Cards Help You Improve Your Credit?

By
Mortgage and Lending with Olympus Labs

Are you interested in a loan to pay off credit cards and personal financial debt? Find out how it can also boost your credit score.

You know that your credit score matters a lot. Those three numbers are used to tell employers, lenders, and landlords how responsible you are with credit. They use those numbers to decide if working with you will be a major risk or not.

You could be in a bit of credit card debt that you want to pay down quickly. That can be hard to do when you pay a lot of interest. You may be tempted to get a personal loan to pay off credit cards.

Can a personal loan to pay off credit cards help or hurt your credit? That’s a question you should ask yourself before you sign up for a loan.

Keep reading to find out if using a personal loan will help you bring up your credit score.

The Numbers Behind the Numbers

It helps to understand how your credit score is calculated to answer if a loan to pay off credit cards will improve your score or not.

Let’s start from the beginning. There are three major credit reporting agencies – TransUnion, Equifax, and Experian. These agencies will track your credit accounts. They know when you open a line of credit, take out a credit card, when you make a payment, and more.

These companies will take your credit information and use it to create your credit score.

You may also have heard of FICO and VantageScore. What are these companies and how do they fit in with your credit score?

FICO and VantageScore will take your information from the three credit reporting agencies and come up with their own score.

With so many scores, how do you know how to improve your credit? The key to remember is that they look at all of the same factors. The difference is that each credit score places a little more emphasis on some things more than others.

The main factors that you need to pay attention to are:

  • How much debt you have vs. the amount of credit available

  • Payment history

  • Credit inquiries

  • Total Credit History

  • Types of credit (credit cards, loans, etc.)

  • Negative marks (bankruptcies, collections, closed accounts)

The differences in credit score will vary between TransUnion, FICO, and VantageScore because they look at this information and will weigh it slightly differently.

VantageScore will use the credit utilization rate to make up 35% of your credit score. Meanwhile, 30% of your FICO score is your credit utilization rate. That slight difference will cause your scores to be slightly different.

You should know that most lenders will look at your FICO score to determine your creditworthiness. It’s been around for many years, and it considered the industry standard.

Does a Personal Loan to Pay off Credit Cards Make Sense for You?

It depends. That’s really the best answer. There are some situations where a personal loan can help you bring down your credit score. Here’s how a personal loan can impact your credit score.

Credit Inquiries

First, you’ll show a credit inquiry on your credit report because you’re applying for the loan. That can bring down your credit score a couple of points.

This usually doesn’t have a huge impact on your score and the impact fades over time. You can get around this part by applying for personal loans with no credit check.

Credit Utilization Rate

A personal loan will also impact your credit utilization rate. You’ll have more credit available which can lower that ratio.

For example, you have $9000 in credit card debt. Your maximum amount of credit available is $10,000. That would make your credit utilization rate 90%. You want this ratio to be as low as possible, otherwise, you’re going have a low credit score.

Now add a personal loan for $10,000 to the mix. You move that $9000 of credit card debt over to the loan. You now have $9000 in debt with $20,000 in credit available. Your credit utilization rate drops to 45%.

You just have to pay off the debt and not charge anything on your credit cards to improve your credit score.

Credit Mix

One other area where your credit score will be impacted is the credit mix. Credit agencies like to see different types of credit on your report. Having just one type of credit on your report like credit cards will have a negative impact on your score.

Now, you’ll have credit cards and loans, which can slightly improve your credit score.

Payment History

The one major area that impacts your credit score is entirely up to you. That’s your payment history. If you take out a personal loan to pay off credit cards and make late payments, that will bring down your credit score in a big way.

You have to do everything in your power to make your loan payments on time.

Negative Marks

In some cases, you may have had financial issues and had credit accounts closed because of late payments. You could have a balance outstanding on these accounts and they’re in collections.

You could use a loan to pay off these debts just to get them done and over with. If you do that, make sure you ask your creditor to remove these accounts from your credit report.

Keep Your Credit Score High

Your credit score has a big influence on so many other areas of your life. You need to make sure that it’s as high as possible. It can be harder and harder to do in today’s economic environment.

There are financial products that you can use to pay down debt, which may help you improve your scores. You can take out a loan to pay off credit cards. It seems like a good deal because you’re likely to get a good interest rate.

Whether or not you improve your credit score is up to you. You have to make sure that you take out the right loans, pay your bills on time, and keep your credit utilization ratio low.

You’ll soon be ready to save and invest your money. In that case, you’ll want to visit this blog often for the latest investment tips and strategies.

 
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Hi there, 

Thank you for a thoughtful blog post on this important topic.

Oct 09, 2019 11:53 PM #1
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David Jackson, MBA

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