For better or for worse, our credit worthiness is judged by our credit scores. A low credit score can mean a higher interest rate on a car loan or a credit card. Because all debt is not the same, making payments promptly each month may not improve a credit score for someone carrying only credit card debt.
Too much credit card debt can lower a credit score because of the credit utilization ratio. The ratio is the amount of outstanding credit card debt in comparison to a card’s credit limit. The higher the ratio, the more of a negative impact it will have on our credit scores. Personal loans help improve scores in three ways.
Personal loans improve the debt mix
One factor that influences a credit score of the average Laguna Beach consumer is the debt mixture. It is better to have a balanced mixture of outstanding debt, such as:
- Mortgages
- Car loans
- Credit cards
- Personal loans
Lower credit scores are usually associated with credit reports that are heavily weighted in favor of credit cards. This is because credit cards are revolving lines of credit that may be borrowed against over and over again as they are paid down.
Installment credit, such as a personal loan, is looked upon more favorably than credit cards by the companies that create our credit scores. Unlike a credit card, a personal loan does not add to the credit utilization ratio.
Eliminating high interest debt with a personal loan
As a general rule, the 2015 interest rate on a personal loan, whether secured or unsecured, is lower than the interest we pay on our credit cards. Using the proceeds from the loan to pay off credit card debt reduces the credit utilization ratio and reduces the interest we are paying. Both activities will help to increase our credit scores.
Personal loans offer fixed monthly payments
We can easily fall into the credit card trap of paying only the minimum monthly payment. The average credit card holder makes the minimum payment in November only to see very little change in the principal balance when the statement comes in the following month.
Personal loans come with a fixed monthly payment computed to pay off the principal and interest within a stated period of time. Paying down debt balances improves credit scores.
Would you like to learn more about how you can improve your credit score with a personal loan, call Bart Zandbergen CFP® at (949) 297-8318 or visit our website.
