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I often hear about various companies offering loans to allow one to pay of their high interest credit card debt, at loan rates of 4.99% over a fixed time frame between 2 to 6 (sometimes more) years.
While it is helpful for one to get rid of the credit card debt with APR interest rates of 18%-22%, how does taking out a loan negatively effect ones financial profile?
If you have to means to consistently make your minimum or higher monthly payments, does it negatively effect your credit rating (risk, score, etc) to have taken out a loan?
Does it negatively effect you in other ways that I am not considering?
What are the downsides to taking out such a loan, if you are a person who has the means to pay it off in a fixed amount of time?
Get the loan, pay off the cc and pay the cc in full each month. For a couple of days you will have a very high debt ratio but probably the following month you credit score will be back to where it is now.
A loan will increase your score significantly if you have a high credit card utilization.
Let's say you have 5 cards and your balances are 80% of utilization. Once you get a loan and payoff the balances, your utilization becomes 0%.
Positives: taking out loan lowers utilization, and adds an account to your credit profile.
Negative: adds and inquiry to your profile.
High credit card utilization has a big factor on your score. High utilization on a installment loan has a low impact on your credit score. Both quoted from credit karma.
I often hear about various companies offering loans to allow one to pay of their high interest credit card debt, at loan rates of 4.99% over a fixed time frame between 2 to 6 (sometimes more) years.
While it is helpful for one to get rid of the credit card debt with APR interest rates of 18%-22%, how does taking out a loan negatively effect ones financial profile?
If you have to means to consistently make your minimum or higher monthly payments, does it negatively effect your credit rating (risk, score, etc) to have taken out a loan?
Does it negatively effect you in other ways that I am not considering?
What are the downsides to taking out such a loan, if you are a person who has the means to pay it off in a fixed amount of time?
its interesting when someone is so worried about their credit that they are willing to pay 18-22% interest rather than risking some damage to their credit score. any damage to your credit score will certainly be less than the value of what you are paying in interest.
however, in this scenario it would seem that you would be adding a credit account, adding a hard inquiry and reducing your credit card utilization. my guess is that it would have a net positive impact on your credit score. more importantly, it could save a lot of money.
its interesting when someone is so worried about their credit that they are willing to pay 18-22% interest rather than risking some damage to their credit score. any damage to your credit score will certainly be less than the value of what you are paying in interest.
however, in this scenario it would seem that you would be adding a credit account, adding a hard inquiry and reducing your credit card utilization. my guess is that it would have a net positive impact on your credit score. more importantly, it could save a lot of money.
Exactly, you want to reach the point where you literally don't need a credit score because you are financially independent, and the way to get to that is to get out of debt fast so you don't pay interest to others but start paying yourself, instead of worrying about your credit score and paying $$ in interest.
And you don't immediately charge up that now empty credit card again. I've seen that done a number of times.
This is the key. If you can borrow the money unsecured at a reasonable interest rate and make the payments there is no downside to doing what's suggested here. Decreased credit utilization is a major plus, especially if it's a sizable amount of debt, and making regular payments on an installment loan on time will help as well. A hard credit inquiry might ding you a couple of points, but by itself won't have any impact after a couple of months.
But running up the CC again will leave you much worse off than you are.
its interesting when someone is so worried about their credit that they are willing to pay 18-22% interest rather than risking some damage to their credit score. any damage to your credit score will certainly be less than the value of what you are paying in interest.
however, in this scenario it would seem that you would be adding a credit account, adding a hard inquiry and reducing your credit card utilization. my guess is that it would have a net positive impact on your credit score. more importantly, it could save a lot of money.
It would also negatively affect your score by bringing down the average age of your credit accounts. But, again, this would be temporary and I'm certainly not advocating against doing it because of this.
Personally, I wouldn't see this as a bad thing, unless you were looking to buy a house/car within a relatively short period of time.. Which you probably shouldn't be doing until you've got the debt under control anyway.
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