Consolidating or reducing your debt is definitely something that will help you in the long run, but a personal loan may also provide additional benefits that you don’t know about; but you should.
Most people would agree that it is important to have a solid strategy for reducing debt.
Most people would also agree that one of the best ways to do this is to consolidate your debt into a home loan but many probably have never thought of simply taking out a personal loan for the purpose of debt consolidation.
This is definitely a tool that you should consider if you are looking for ways to improve your credit and here are three reasons why:
First of all, and what should be the most obvious, consolidating your credit cards under a personal loan will immediately free up your lines of credit.
Of course, this provides you with the benefit of having available credit but what you will like more is that it improves your utilization ratio; this is the ratio of total credit to available credit.
By reducing your revolving credit (credit that you keep using over and over again) and transferring the debt to installment credit (like a personal loan, which sets up an established amount and time frame for repayment) you may actually improve your credit score.
The reason for this is the credit bureaus judge revolving credit and personal loans differently.
This leads to the second way a personal loan can benefit you: by giving you more variety in your credit. Consumers with the best credit scores usually have both revolving credit and installment loans.
A personal loan is a type of installment loan that does not necessarily have a specific designation for use. Installment loans also include mortgages and student loans.
Finally, a personal loan can help you by giving you more opportunity to pay down your balance faster. Personal loans often feature a three-year repayment plan, which lets you know exactly how much you need to pay every month in order to pay it off in three years. Of course, you can then choose to adjust your payments according the time frame that you prefer.
Because of the way they are situated, though, you won’t be able to miss a payment if money is tight; this forces you to be more responsible with your money so that you can continue making payments.
All things being equal, though, debt consolidation is not always the best strategy; it does not always yield the results that you want. You have to remember, for example, that every time you open a new loan or a new line of credit your credit score will take a hit.
This is because, obviously, more credit represents greater liability. Obviously, this will begin to work itself out over time, but you have to be willing to invest the time and effort to be consistent and make it happen.
Another thing that you have to remember is how important it is to keep your lines of credit open after the consolidation. The point of the consolidation is to reduce your payments and improve your credit stance; remember the credit utilization ratio.
In order to maximize this and get a bump in your credit score, you need to have an open line of credit that you are not using. While it is important to keep this interval as big as possible, you should also try to use one or more of your still-open lines of credit every so often because the card issuer will close the account due to inactivity if you do not. You can just charge a tank of gas or pay a utility bill a couple times a year to accomplish this.