3 Reasons a Personal Loan Can Help Your Credit Score


The holidays can take a toll on your financial wellbeing for many reasons — the high costs of holiday feasts, travel expenses, and gifts for friends and family add up quickly. It has been approximately one billing cycle since many Americans racked up high credit card balances, and now it is time to face the reality of that spending.

A LendingTree survey found that one in four Americans struggle to pay their holiday shopping debt. If the balance on your credit card is higher than 30 percent of your available credit (e.g., if you have a $1,000 limit your balance should not exceed $300), this will negatively impact your score. If you have multiple credit cards with high balances, your credit score will especially be taking a hit.

While the only way to truly improve a damaged credit score caused by high credit card debt is to pay the debt down, there is one method that can make it easier for you to do so, and that is through a personal loan. Here are three reasons why this can help:

  1. Credit utilization ratio

When you transfer your credit card debt to a personal loan, this frees up your available credit and improves your credit utilization ratio. This ratio accounts for nearly 30 percent of your credit score. The most important thing not to do is use your newly available credit and end up in the same situation. Avoid impulse purchases by not carrying your credit cards in your wallet. Stow them away so that they are only accessible in times of dire emergency.

You may be tempted to close your credit accounts to ensure you do not accrue new debt, but that would negate this potential boost to your credit score because your improved credit utilization ratio would be erased from your credit report.

  1. Debt consolidation 

If you have multiple credit cards, it can be difficult to keep up with multiple monthly payments. This can make you vulnerable to late payments, which will only hurt your credit score further. In fact, late and missed payments are the most heavily weighted factor in determining your FICO credit score. Always pay your bills on time when working to repair your credit score. A personal loan can consolidate multiple credit card bills into a single monthly payment, making your debt easier to manage.

  1. Different types of credit 

Credit cards are referred to by the credit bureaus as revolving accounts, whereas personal loans are referred to as installment loans. Having a mix of credit accounts is viewed favorably by the bureaus, and your score could be negatively impacted if you only have revolving accounts. Installment loans are also treated differently than revolving accounts in that the same amount of debt could be less harmful to your score if reported as an installment loan rather than as a revolving account near its limit.

One of the primary reasons paying off credit card debt takes so long is the ability to continue to spend, coupled with accruing interest. By transferring your debt to a personal loan, you do not have that ability. Your credit card debt is transferred to a personal loan with set repayment terms and a definitive end date, allowing you to achieve your debt payoff and credit rebuilding goals.

Contact Lexington Law Firm for a free credit consultation to see other ways your credit score can potentially be improved.

Related Articles:

Ways to Increase Chances of Acquiring a Personal Loan

Credit Repair and Debt Consolidation

How to Manage Student Loans Without Hurting Your Credit