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Personal Loan
Will a personal loan (unsecured loan) used to payoff cc’s improve my score?
I discovered a website today http://www.prosper.com that offers personal loans for all sorts of reasons. It looks like the real deal. Somehow tied in such that it reports to your credit report though. So my question would be: If I have a personal loan for ~$14k on my report-pay back over 3 yrs., is that better for my score than the 7 different credit cards that total the same? I am just looking for chances to consolidate and strengthen my score.
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1 Reply
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Consolidating your high-interest credit card debt with a personal loan can improve your credit score, and this is how it is achieved:
Credit Utilization Ratio
Impact on Utilization: High average balances on credit cards relative to the limits are a risk factor in credit scoring models. Seeking a personal loan to pay off your credit cards means that your average credit utilization will decrease, which will have a lively effect on your credit score. Also, lenders consider your credit utilization when looking for a loan.
Ideal Utilization: The ideal credit utilization is below 30%. Paying off credit cards, especially those with high limits, will certainly help lower this figure.
Credit Mix
A Blend of Different Types of Credit: Possessing different types of credit accounts (personal loans, auto loans, mortgaged loans, and revolving credit such as credit cards) will positively influence your score. Personal loans in your credit account are good because they help diversify your credit mix.
Payment History
Being Consistent: Paying your loan on time will count positively towards your payment history, which remains the most important factor in your credit report. On the contrary, unpaid credit card bills will lower the score when reported.
History of Credit Accounts Owned
New Accounts: New personal loans would mean opening a new account, thus reducing its average age. However, the improvement in utilization and payment history in the long haul could offset this.
Risks to Consider
Fees and Interest: Note the credit card fees and the personal loan costs. Make sure the loan rates are more advantageous than the credit card rates.
Closing Accounts: If you pay off and decide to close the credit card accounts, this will affect the amount of credit that is available to you and a shorter length of credit history.
Transferring your credit card debts to a personal loan may help your score increase, but mostly if the ratio lowers with good repayment performance. Ensure that the loan terms from Prosper or any other lender are worth it.