Using a Personal Loan to Pay off Credit Cards and Improve Your Credit Score
Your credit score is not as mysterious as you may think. The score can range from 300 to 850, and it takes into account how many times lenders have looked at your report recently, if there are collections activities, your use of credit, how long you’ve had credit, and what types of accounts you utilize. One easy way to build your score is by getting a personal loan to pay off credit card debt.
A Combination of Account Types can Lead to Higher Scores
According to Forbes, having a personal loan and credit card account can give your score a slight boost. If you use the personal loan to pay off the credit card balance, then you’ll enjoy the bump without increasing your debt levels.
How it Works on the Report
The FICO score takes into account how credit is utilized. Ideally, you should have open credit available to show that you are in control of your spending habits. When you switch to a personal loan, you’ll reduce the utilization and have more open credit sitting on the cards.
How It Impacts Your Personal Finances
The first step is to find a personal loan with a lower interest rate than your credit cards. Typically, you can find more attractive financing charges by going with this route, but you should still look at the fine print to ensure that the interest rate will drop.
The second part of this equation is to continue paying the same amount on the debt. Getting the lower interest rate is excellent, but you won’t reap the same benefits if you also lower your payments. By paying the same amount every month, you can pay off the personal loan early and save on the overall cost of financing.
Finally, you’ll have to take steps to ensure that you don’t charge the credit card back up again. The point here is to save money and get out of debt faster. The purpose is defeated if you decide to use the card for any purchases. There are several steps you can take to ensure that the card is reserved for emergencies, including leaving the card at home in a filing cabinet.
Leave the Account Open
Once you secure the personal loan and pay off the credit card, leave the account open. The open account with a zero balance is a great way to show that you can resist temptation. This will also help you improve your credit score, according to Experian.
Utilize the snowball effect to expand on your success. Once you pay off the personal loan, use the newly available funds to start paying down other debts like your car or student loans. You can also take the extra funds and put them into a savings account so that you won’t have to reach for the credit card when you need emergency car repairs. With this formula for success, you can get on the right track for financial stability.