Consolidating Credit Card Debt Can Dramatically Boost Credit Scores, Study Finds

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A new study suggests that consolidating credit card debt can be a smart move that can pay off in several ways. In addition to the belief that paying bills on time can improve credit scores, LendingTree’s latest analysis yes and no of credit card consolidation found that those who consolidated at least $5,000 in credit card debt found their credit score increased by an average of 38 points in as little as one month.

In fact, the study concludes that the more a person pays off credit card debt with a personal loan, the more their credit score increases. Let’s say you pay off $10,000 or more in credit card debt. In this case, credit ratings increase by an average of 49 points. The reverse is also true. The study found that by taking out a loan to pay off between $1,000 and $5,000 in credit card debt, borrowers earned an additional 17 points, on average, over a single billing cycle.

While taking out a personal loan to pay off credit card debt might seem like a bit of stealing from Peter to pay Paul, Matt Schulz, chief credit analyst at LendingTree, says it’s definitely worth it.

“A higher credit score is a big deal because there are few things in life that are more expensive than lousy credit,” Schulz said. “It can cost you thousands of dollars in the form of higher loan interest rates, higher insurance premiums and more. It may even prevent you from getting that new apartment you’re hoping to rent.

But Schulz warned that while consolidating credit card debt will likely cause someone’s credit score to rise, there are more benefits to eliminating the debt altogether.

“Eliminating that debt can’t be anything less than life changing,” Schulz said. “It can free you up to build an emergency fund, save more for retirement, work to buy a house, or pay for your kids’ college education. It’s a big, big problem.

Where to Get Consolidation Loans and What to Consider

Schulz said for consumers with the highest incomes and best credit scores, getting a personal loan from a bank is the best bet. “These are probably people who have significant experience with lenders and at least a few other pieces of that credit report. These people have a lot of other data points on their credit report that influence their credit score, so a change, even a big one like paying off all that debt, may not have as much of an impact for them as it does for someone else. one more recent. credit,” he said.

ConsumerAffairs investment advisor Barbara Friedberg agreed. She said the easiest way to get a debt consolidation loan is through a bank or other debt consolidation lending institution.

Friedberg said if consumers can’t — or won’t — go the banking route, there are three other ways to get out of credit card debt.

0% Balance Transfer Card: Balance transfer credit cards allow consumers to consolidate debt by transferring debt from multiple credit cards to a single balance transfer card. Friedberg notes that some of these cards include 0% interest offers as well as sign-up bonuses and cash back.

Home Equity Loan: “Homeowners can withdraw an amount of money based on the equity in their home, determined by the amount of money paid on the mortgage compared to the value of the home,” Friedberg said, adding that a loan on home equity can be contracted. to make home improvements, pay large bills or settle other debts.

401(k) loan: A unique approach offered by Friedberg is for people who have set up a 401(k) through their employer. For these people, they can borrow from this account. “Because a 401(k) is a personal retirement savings account, it’s essentially a loan from yourself. Because you are withdrawing money from an account and not borrowing new funds, a 401(k) loan will have no impact on your credit score. 401(k) loans generally require full repayment within five years,” she said.

This 401(k) loan idea comes with a caveat, however. Friedberg said that most likely there will be a little interest added to a person’s repayment plan, and it may also hurt their overall retirement savings plan. For those whose jobs may be precarious, Friedberg raised his warning a bit higher. “If you lose your job, you will have to pay off the 401(k) loan when your federal income taxes are due for the year,” she said.

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