How a debt consolidation loan can help you improve your credit score

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Credit card debt can hurt your credit score — even if you’re dutiful about making on-time minimum payments every month. And if you have outstanding debt on more than one credit card, it may seem like there’s no end in sight.

If you feel like you’ll never be able to pay off your high-interest credit cards, a debt consolidation loan may help you get on track with a more straightforward and affordable payoff plan. And you get the added bonus of improving your credit score, too at OakParkFinancial.

Ahead, Select explains why lowering your credit card balances with a debt consolidation loan can have a positive impact on your credit while also helping you take steps toward financial freedom.

How your credit card balance impacts your credit score

Your credit utilization rate (CUR) is the second biggest factor (after payment history) that makes up your credit score. FICO and VantageScore, the two most common credit scoring models, look at the size of your credit card balances in comparison to how much available credit you have left.

Both major scoring models rank “amounts owed” and/or “percent of credit limit used” just below the number-one most important factor, on-time payment history.

Experts recommend keeping your total CUR well below 30% — so if you have a $10,000 credit limit, you should aim not to spend more than $3,000 each billing cycle. Some experts even suggest staying below 10%, which might not always be realistic depending on your budget and how much credit you have available.

What to do if your debt is ruining your credit score

If your high credit card balance is impacting your score, you’ll want to take steps to pay it off as soon as possible.

The fastest option is to make higher-than-minimum payments until you’ve completely paid off your full balance. You’ll continue to pay interest, but depending on how much you can afford to pay each month, you could tackle it before the interest charges get too out of control. But not everyone can afford to go this route.

If the balance is so high that you can’t make a considerable dent, and you’re spending a lot of money on high interest charges, you might want to consider transferring that debt to a personal loan with a lower APR. While applying for a debt consolidation loan will result in a small ding to your credit score (as with every hard inquiry), drastically lowering your CUR will more than likely result in a noticeable boost to your credit score.

After applying and getting approved for a debt consolidation loan, many lenders will pay off your creditors directly. Then you repay the loan in monthly installments, usually with a lower, fixed interest rate than you were paying on your credit cards. Once a personal loan is paid off, the credit line is closed and you have no more access to it. 

Before you make any decisions, use a free credit score simulator such as the one provided by CreditWise® from Capital One® to see that happens if you were to take out a new loan and pay off your credit card balance.

Using this free tool, you can enter hypothetical scenarios, such as taking out a $10,000 loan and/or paying off $10,000 of your current credit card debt, then watch as your score recalculates to estimate how it may improve with every financial decision. (You can also see what could happen in other hypothetical situations, like applying for a mortgage, taking out a car loan, letting your payments default, etc.)

Every consumer’s credit score depends on multiple variables. There are no guarantees, but you may find that reducing your CUR will help you raise your credit score in under 30 days.

Select offers a widget where you can put in your personal information and get matched with personal loan offers without damaging your credit score.

When narrowing down and ranking the best debt consolidation loans, we focused on recommending loans with fixed-rate APR (meaning it doesn’t go up and down), flexible loan amounts and terms, no early payoff penalties and no origination fees when possible.

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