How to Use a Personal Loan to Boost Your Credit Score and Pay off Credit Card Debt: Does taking a loan to boost your credit score really make sense? In any case, taking out a loan usually translates into more debt. When you get a personal loan to pay off debt, however, you may enhance your score. Let’s look at how this financial tool can help you build your profile and repay card debt.
How to Use a Personal Loan to Boost Your Credit Score and Pay off Credit Card Debt
What Do You Need to Know About Personal Loans?
Unlike auto or home financing that are created for fixed purposes, a personal loan can be used to address a wide array of financial needs. For instance, you can use it to cover your medical bills, sudden home repair expenses, raise capital for your new business, or even buy an expensive home item.
Given that this product has lower interest rates compared to traditional cards, you can use it to consolidate card debt as well as other debts with crazy-high interest. It is also typically unsecured, which means you don’t need to pledge collateral. Due to its unsecured nature, it comes with higher rates than secured ones like home or auto financing.
You can obtain this financial product from a bank, online lender, or credit union. You will get an offer that reflects your profile and the amount you are borrowing. Provided you have a decent score, you can typically get the borrowed amount within days. The greater your credit score and financial responsibility history, the smaller the interest fee you can anticipate.
Why Is Repaying Credit Card Debt Using Personal Loans Important?
These financial instruments are mostly created as debt-crushing tools. They are readily accessible to individuals with varying incomes and scores. They are a perfect way to pay down debt due to the following five reasons.
- You Can Cut Down Interest Rates
One of the main benefits of this product is that it is usually less costly than having a card balance. While a card will typically attract an 18 percent annual percentage rate (APR), this financial tool can carry a rate of as little as 5 percent for consumers with a great profile.
- Collateral Isn’t Necessary
Your capability to pay is what determines whether a lender will approve your application for this product, so you don’t need to pledge any of your assets as collateral. You just need to give your lender proof of consistent income.
- You Secure More Time
These funds usually have longer repayment terms that can range from two to five years, but most lenders prefer giving you three years. A longer repayment period enables you to get a reasonable rate and pay down the balance with equivalent monthly installments that suit your unique budget needs.
- Every Payment Translates into Progress
According to nation21loans.com, when it comes to personal loans, every monthly installment you make reduces both the principal and interest. Assuming you obtain three-year funding, your balance will drop to zero once you make your final payment. If you feel that your card balance is getting out of proportion, consider applying for this product.
- Your Score Doesn’t Need to be Perfect
These loans generally have lower score requirements compared to balance transfer cards, making them an ideal option if you have a not so great money management history.
Practical Ways to Improve Your Score with a Personal Loan
These loans enable you to create a positive payment history that makes up for 35% of your FICO rating through making monthly payments for the entire length of the term. What’s more, they can pay off your debt and boost your credit mix. Here’s how to use this tool to raise your score.
- Be Cautious When Deciding the Amount
Because you are borrowing to build your profile, it’s important to borrow an amount you can afford to repay. To avoid the temptation of borrowing more than you need, evaluate the need and choose an amount that can address it adequately.
- Make Payments on Time
Delaying or failing to make monthly payments for a debt meant for enhancing your creditworthiness isn’t a good idea. Due to the unsecured nature of cards and most personal loans, they can cause a bigger negative effect on your FICO score than other types of borrowing options. To make sure payments are made on time each month, put an automatic payment system in place.
- Don’t Pay Back Fast
If you have borrowed money intending to build your creditworthiness, you shouldn’t repay it way earlier than its maturity date. A stretched positive financial history will have a positive impact on your score. For this reason, you should keep paying until a longer-term.
- Search for Small Credit-builder Loans
Some lending companies and online lending platforms provide credit-builder financial tools. These tools are usually for negligible amounts, so you won’t struggle to pay them off. Their main advantage is that the lender will report your payment activity to relevant scoring bureaus. This helps you get your score back on track in a hassle-free way.
The role of a personal loan goes beyond just cutting down card dues and paying unexpected expenses. It can be a valuable tool for an intelligent borrower who has a strategy for getting debt-free, improving financial history, and charting his or her way to financial freedom. There are tons of these financial products offered by brick-and-mortar lending institutions and online lenders. Be sure to explore all your options to help you find a product that will best address your needs.