Moving your credit card debt over to a personal loan, or a consolidation loan could have multiple different outcomes for your credit score. Getting rid of credit card debt should positively impact your credit score. That being said, there are situations where taking out a large personal loan could lower your credit score. Ultimately, it depends on your specific financial situation, and where your credit score currently stands.
It’s tough to say how any one act will impact your credit score. That’s because paying off a personal loan for one person may raise their credit score, and for another, it could potentially lower it. This is due to something called your “credit mix.”
Credit mix is a term used to describe all the different types of credit you’re currently using. The credit bureaus that calculate your score take this into account. It usually accounts for about 10% of your overall credit score. Having a more diverse array of credit products and loans will positively affect your score, while not having enough types of credit may lower it.
If you choose to take out a consolidation loan in order to pay off your credit card debt, it’s important to first know your credit score and be familiar with your credit history. If you currently have a lot of credit card debt, then a consolidation loan could potentially help your score by getting rid of it and improving your credit utilization ratio. Keep in mind, you still have to pay this debt, and consolidating does not get rid of it entirely.
Consolidation can be a great option for people who have several monthly loan and credit card payments. It will help simplify your finances by combining several payments into one. It can also potentially lower your interest rate if your consolidation loan interest rate is lower than the average rate for all your other debts.
Make sure that if you’re considering consolidating your credit card debts, that you thoroughly research your options, ask questions, and don’t commit to a loan you aren’t 100% sure you can repay by the due date.