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Personal Loans, Credit Card Payoffs, and Your Credit ScoreSubmitted by Integrity Advisory on October 5th, 2018
Today, our credit score affects much more than our ability to buy a house or finance a car. Our credit score can also affect our insurance premium, our ability to rent an apartment, and even our ability to get a job.
Personal Loans and Credit Card Payoffs
With credit card interest rates ranging between 11 to 22%, it’s no wonder people are looking for alternative ways to handle and pay off their credit card debt. This is where a personal loan might come into play. Using a personal loan to pay off your credit card debt can help you manage your overall debt once and for all... if you know how to navigate the pitfalls. Find out what you need to know to use this method to effectively manage your personal debt.
Understand the interest rates and what they cost you. It makes no sense to consolidate your credit card debt into a personal loan if the interest rates aren't any more favorable to you than the credit cards you’re currently working to pay off. Personal loan rates can vary, but for someone with good credit, they can be as low as 6%. However, if your credit score is low, you won’t qualify for such a favorable rate, and you might not be getting a better deal than you would with your credit card.
Know where to go. It’s a good idea to shop around, but consider starting with your own personal bank to see what they might be willing to offer you. They may have special deals for existing customers, or they may be able to offer you slightly lower rates for having a long-standing relationship with them. Keep in mind that each bank will operate under their own guidelines and rules for lending, and with some banks it may take weeks to get approval while others will give you approval within an afternoon.
Be careful of payday loan lenders. While less stringent in their underwriting habits and typically accompanied by a slightly unsavory reputation, payday loan lenders are more willing to lend to those with questionable credit history than a traditional bank or financial institution—which makes them more attractive to those with low credit scores. The key is to understand the deal: is the interest rate and the terms you’re getting with the payday loan better than the interest rate on the credit card you’re trying to pay off? If not, then it’s not worth the hassle.
Finally, consider online lending institutions. Unlike traditional banks, lending institutions are able to keep their overhead low without the brick and mortar locations, and may be able to offer lower rates as a result. The downside: you won’t be able to talk to a banker in person.
Look for fixed rates instead of variable rates. When you’re shopping for a personal loan, make sure you understand what kind of interest rate you’re being offered. With a fixed rate loan, you’ll be getting a consistent rate over a course of time. With variable rates, you might be able to get a lower rate initially, but you’ll have no control over where the rate goes over the course of the loan. This could drastically affect your ability to repay the loan over time. Most lenders work with fixed rates, but you’ll want to be sure before you sign on the line.
Watch for origination fees, application fees, and prepayment penalty fees. Unlike a credit cards, personal loans will have an upfront fee charged to the borrower for the servicing and maintenance of the loan, and they may even tack on an application fee. Origination fees can vary by bank, so you’ll want to shop around and compare prices . Depending on the bank, you may be able to negotiate with your banker and ask that the application fee be waived.
Finally, make sure you ask up front whether there are penalties for paying off the loan early. Prepayment cuts down on the money the bank makes off the loan, so they have an interest in stretching out the payments to the agreed-upon timeframe. If it’s your goal to get your loan paid off as soon as possible, make sure you won’t be hit with hefty fees for doing so.
Using a personal loan to pay off credit card debt doesn't have to be a headache or a hassle. Just make sure you understand the interest rates and the fees, and whether or not the combination of the terms actually help you climb your way out of debt.
Credit Management for the 21st Century
In today’s world, good credit is a necessity. Consumer FICO scores are calculated using the information found in your credit report, including the number of open accounts, how much debt you have, how many creditors have sent inquiries about your credit history, and how many, if any accounts have been sent to collection agencies.
Navigating the credit score maze can often feel confusing and overwhelming as we ask ourselves questions like, “Why did my credit score go down?”, “Should I apply for more credit?”, “Should I pay off my collection accounts or pay down my credit card debt?” It certainly doesn't help that there are a variety of opinions out there, some accurate, others not, that serve to confuse you even more.
Here are some common assumptions that many people can make regarding their credit:
Paying off a collection account will raise my credit score. Not necessarily. While collection accounts do get looked at during the credit application process, paying one off does not always raise your score. However, adding another line of credit, such as a credit card, can raise your credit score more than 20 points.
It doesn't matter how much I charge on my credit card as long as I pay my bill on time. Not true. Credit bureaus look at the amount of credit utilized, not just whether the bill is paid on time. So, while making a payment on time will always be important, it’s also important to keep your utilized credit to about 30%. Anything above that will be flagged and likely affect your credit score negatively.
If I file for bankruptcy, I’ll never be able to buy a home. While it’s difficult to purchase a home within two years of a bankruptcy filing, if you have a decent credit score and a reliable job, you will likely be able to purchase a home. However, be aware that a bankruptcy will remain on your credit report for up to 10 years, making it likely that you’ll have to explain the circumstances behind your bankruptcy filing.
I only need to check my credit report once a year. While experts used to advise consumers to look at their credit report annually, it’s probably a good idea to look at your score at least once a month. Many credit card companies provide their customers with free credit monitoring, which notifies you of any unusual activity that shows up on your credit report, such as a new account opened or a credit inquiry. If the service is offered, take advantage of it. It could save you a lot of headaches in the future.
While a credit score certainly doesn't provide the full measure of a person’s credit-worthiness, it serves to provide a snapshot of where you’ve been. Don't let an incorrect assumption spoil your snapshot.
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