Have your credit card accounts gotten a little out of control? Maybe more than a little? Are you wondering what you can do to help you manage your debt more effectively?
Bringing it all together under one lender with one payment is a solid option, which brings us to credit card consolidation personal loans. Aside from a mouthful, this is a strategy for managing your credit card debt by consolidating it all into one personal loan. You find the right lender, get approved and take out a loan that is enough to pay the balances on all of your credit cards. Your credit cards are paid off, and you make one payment each month to your personal loan.
What are the pros and cons? Let’s investigate.
Benefits of a credit card consolidation personal loan
If you have too many credit cards or too much debt on your credit cards, it can get expensive and stressful. Once you fall behind on payments, interest and fees can add up and you may get into a hole you can’t get out of. All the while, your credit score will be dropping.
Here’s how a credit card consolidation personal loan can help.
Simplify and reduce payments
The most important factor in your credit score, accounting for 35% of it, is paying your bills on time, says myFICO. If you are struggling to make multiple credit card payments each month, consolidating them into one loan can help. Not only will it be easier to manage one monthly payment in place of several, but you may also be able to find a lower interest rate that reduces the cost of your debt. This can result in a lower monthly payment and/or a quicker payoff. Katie Ross, Education and Development Manager for the American Consumer Credit Counseling (ACCC) says, “Loans often have a better interest rate than some credit cards or other debt, so this is an acceptable method to manage debts. The important thing here is that the personal loan is not new debt. You’ve simply transferred multiple debts into one location. ”
Lower your credit utilization ratio
The second most important factor when it comes to your credit score, according to myFICO, is how much you owe. It’s not necessarily bad to owe, as long as you don’t owe too much. One of the key components of this factor is the credit utilization ratio, which looks at how much revolving credit you have used compared to how much is available. Experian recommends keeping your credit utilization ratio (CUR) below 30%, and that goes for both your total CUR on all revolving accounts and your CUR on each individual account.
You can calculate your CUR by dividing the amount you owe on a credit card by how much credit is available. For example, if you owe $500 and your limit is $2,000, $500 divided by $2,000 is 25% CUR. Not bad. On the other hand, if your balance is $1,500 on a $2,000 card, your CUR would be 75%, which would hurt your score.
A personal consolidation loan can help you to lower your CUR by paying off your revolving credit balances and transferring them into an installment type of loan.
Improve your credit mix
A personal loan can also help your credit mix, according to myFICO. The credit mix is a FICO score factor that looks at the types of credit you have. It accounts for 10% of your score, and it’s recommended to have both credit cards and installment loans.
If you have only revolving credit accounts now, which include lines of credit and credit cards, a personal loan will give you an installment loan on your record. Of course, you don’t want to open accounts you aren’t going to use, but a good mix of responsibly managed accounts will help your score.
Drawbacks of a credit card consolidation personal loan
Yes, those are the good points, but what’s the catch?
First, the length of your credit history is a factor in your credit score, so keeping credit cards open while paying down your new loan will help you. However, it can be tempting to reuse the credit available on your cards once the full balance becomes available. If you do, you can get into a worse position than you started in. Focus on paying down your personal loan and don’t use the credit cards unless it is simply to show activity on the account and which you pay off by the due date (and keep under the 30% CUR).
Second, the rates and terms you qualify for on your new personal loan will depend on your creditworthiness and the lender you choose. You may run into some lenders that offer a great value on the consolidation while others will be more expensive. For this reason, it is important to shop around to find out what different lenders are offering.
One potential problem you can run into is that the “new credit” FICO score factor weighs how many credit accounts you have tried to open. It figures this out by looking at how many hard inquiries are on your report. Hard inquiries are sent to the credit bureaus from lenders during the loan application process. If you have too many, you become more of a risk to lenders and your credit score can go down.
Shop for a personal loan without hurting your credit
To save time and ensure your credit score isn’t negatively affected when shopping for a credit card consolidation personal loan, try SuperMoney's personal loan prequalification tool. It asks you a few questions to find out more about your situation and then provides you with quotes from a list of lenders.
Going this route won’t hurt your credit score and allows you to easily review and compare a number of lending companies apples to apples. Look for the company that can provide you with the following:
- The loan amount you need
- A low interest rate
- Minimal fees
- A competitive overall cost
- A monthly payment that you can afford
- Good reviews
Then get your loan, say goodbye to out-of-control credit card debt and get back on the path to a better financial future.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.