Boost Your Credit Score with a Personal Loan
Updated: Sep 22
Credit cards can be useful finance tools. They can help you afford big ticket items by measuring out how they’re paid for and allow you leeway in day-to-day discretionary spending. However, credit card debt can easily balloon out of control and wreck your personal finances and credit score. It’s something few consumers account for until the harm disables their score and leaves them unable to gain new credit lines for major necessary purchases. If you find yourself in this position, you aren’t without options to regain control. One such option is a personal loan. Let’s explore how a loan to pay off credit card debt can get both your finances and credit score back on track.
What’s Your Credit GPA?
Before you can understand how a loan will help, you first need to understand the basics of your score. Think of your score as a GPA on how you utilize and pay back your debts, which includes:
• Timely full-ask payments to creditors
• Length of credit history
• Credit mix of various types of debt
• New debt being amassed verses old debt being paid off
• Credit utilization of how much you owe verses how much you could borrow
The last point is of major concern for credit card holders. Your card has a maximum limit. When you get near that maximum, it hurts your score because you’re viewed as possibly overreaching your budget verses spending. It’s called debt-to-credit ratio. The goal here is to keep your card utilization under 30 percent, but certainly no more than 50 percent max.
Lenders use a similar formula in assessing your debt to income (DTI) ratio, which shows their finance team to assess how much you make in comparison to how much you spend on revolving and stationary bills and discretionary spending.
All of it greatly impacts the value of your score.
How Can A Loan Help Raise The Value Of Your Score?
Did you know that the features of a loan positively influence around 90 percent of the factors that relate to your score? The only negative is that minuscule 10 percent of your score that’s negatively impacted by new lines of credit, which often disappears from your credit in 30 to 60 days.
Obviously, a loan helps add to your credit mix by offering you a different form of credit utilization. It also greatly impacts that credit utilization ratio. Set payments that don’t fluctuate based on spending, such as a credit card’s payment, and making payments to one verses multiple entities both help ensure a timely and uniform payment history.
One of the biggest benefits is the cost savings from using a personal loan to pay off your card(s) creditors. With the right rates and terms for your loan, you can save hundreds to thousands in interest over the course of multiple lines of debt. The loan transitions the debt to a total lower amount by mitigating the cost of the debt.
Let’s say, for example, that you have three cards with 20 percent interest on each. With 20 percent interest three ways, especially on high balances, you could spend years just paying off the interest if you’re making minimum payments toward each. Meanwhile, consolidating all three debts into one standard loan gives you one single interest rate, and it’s often much lower than any one interest rate by card creditors. Plus, you avoid any applicable annual fees just to have the card.
Keep in mind that your combined monthly payment within a loan will most likely be significantly lower than the minimum monthly payments to multiple creditors. This can help you pay off the debt faster or just afford timely, full payments to boost your score.
As an installment debt, not a revolving debt, the loan will also be factored differently in regards to your credit utilization - DTI and DTC numbers. This is because cards from creditors offer the flexibility to pay more or less based on your spending. They fluctuate and can change in a moment based on your decision, which is a weighty factor in lending. A loan doesn’t fluctuate; it’s a fixed monthly payment of a set amount for a descending balance. As such, you also get the benefit of not being tempted to undo your hard payoff work with new charges.
In closing, doing everything you can to maximize the value and standing of your credit score is a necessity to gain access to the best financial and credit tools for your future purchases. If card utilization has harmed your score and is holding you back accessing credit to purchase a home, vehicle, or other necessity, then consider fixing the issue quickly and efficiently with a personal loan.