It is now possible to increase your credit score even if you already have a lot of debt. In fact, consolidating your credit card debt with the help of a personal loan can also help you to increase your credit score by as much as 20 points or even more. This is because it has been estimated that, on average, most consumers who have consolidated their credit card debts have put a stop to their excessive spending habits. In the long run, many of these people manage to pay off close to 60 percent of their total credit card debt with the help of their new personal loans that they have taken expressly for this purpose.
A recent study conducted by Trans Union has found that personal loans have helped consumers reduce their credit card balances from $14,015 to around $5,855 or so on average. Moreover, approximately 58 percent of consumers who decided to consolidate their credit card debt were able to decrease their respective balances by as much as 60 percent or more when compared to their pre debt consolidation levels. And, of course, lower balances meant that they were able to increase their credit score as well, thus ensuring that they were eligible for more financial benefits.
Lower Debt Means an Increase in Your Credit Score
The more you decrease your credit card debt, the lower your credit utilization will be. This may be defined as the full amount of credit you may have used as a specific percentage of your total credit limit. In this case, lower credit utilization always shows the lending companies and other financial institutions that you are a very low-risk borrower. If the company feels that it will be able to recover the principal amount with interest, it will automatically lead to an overall increase in your credit score.
If you are starting with a high score, it will not be as easy to increase your credit score. This means that the 20 plus increase in your point score ranking is going to be totally consistent throughout the full credit spectrum i.e. it does not matter if you are already a low-risk borrower or a very high-risk one with a massive debt burden. If you have decided to consolidate your credit card debts and pay them off with the help of a personal loan, you will be able to immediately see an increase in your credit score.
Utilizing Personal Loans for Credit Card Debt Consolidation
It is possible to safely and easily consolidate all your credit card debts with the help of a specific personal loan. However, this is only possible if it has been taken for the express purpose of eliminating multiple debts. This loan is known as a credit card consolidation loan and, if used properly, it can easily help you to increase your credit score.
Once you take this personal loan, you will be able to consolidate all your current credit card debt (irrespective of the amount) into an unsecured personal loan. As a rule, such kinds of loans are usually repayable within two to a maximum of seven years. There are no minimum and maximum limits regarding these loans and they can range from $1,000 all the way up to $100,000 and even beyond (depending upon the need of the borrower and the ability of the lender).
Why is it Important to Consolidate All Credit Card Debts Together?
There are many different reasons due to which you should consider consolidating your credit card debt:
- Predictable monthly payments stretching for the duration of the loan
- It can lead to a steep decrease in your interest rate
- There is an easy application process
Increasing Your Interest Rate Even as It Leads to an Increase in Your Credit Card Score
Some credit cards have annual percentage rates (APRs) as high as 10 to 25 percent. This means you will end up paying considerably higher interest rates for all mortgages, your auto loans, and your student loans combined. And, of course, very high-interest charges mean that you will be so caught up in making interest payments that you won’t be able to pay off the principal amount. And as you continue taking such loans to stay afloat, the debt (both interest and principal) will start to snowball.
However, it does not have to be this way at all. A personal loan is almost always much lower than a credit card loan. The usual starting point is as low as 6 percent which is much lesser than the usual credit card interest rates and other charges. It will give you the breathing space to start paying off your principal amount rather than simply keeping up with the interest payments alone. And, best of all it, will also lead to an appreciable increase in your credit card score.
o Highly Predictable Payment Schedules
The average credit card debt is based on the concept of a highly variable interest rate, and it might change depending on how much credit you have used on your card. The higher the credit utilized, the greater the interest rate. But personal loans don’t work that way at all. The loan that you take to pay off your debts will have a fixed interest rate instead of a variable one. That means you will be able to pay the exact same and completely fixed amount every month irrespective of any changes in the interest rates.
o A Highly Simplified Application Process
It is much simpler to apply for a personal loan when compared to a credit card. Sometimes, it is as simple as applying online only. The lending institution will evaluate your overall credit profile and fix an interest rate accordingly.
Considering the above, we can see that it is very easy to increase your credit score by consolidating your credit card debts through a personal loan.