Understanding Credit Utilization
Your credit utilization ratio is the percentage of your credit limit that you’re using. Experts suggest keeping this ratio below 30%, with less than 10% being ideal for a healthy credit score.
How a Personal Loan Can Help
While personal loans aren’t included in your credit utilization ratio since they’re installment loans, they can be used to pay off revolving debt like credit cards, which do impact your utilization. Clearing credit card debt lowers your ratio and boosts your credit score.
Debt Consolidation Strategy
If you have high-interest credit card debt, taking a personal loan with a lower interest rate can be smart. You can use the loan to pay off your credit cards, helping you save on interest and manage a single monthly payment instead of juggling multiple credit card bills.
The Formula in Action
Credit utilization ratio = total credit used ÷ total credit limit. Paying off credit card balances directly reduces the “total credit used,” lowering your ratio and improving your score.
Key Considerations
Remember, while a personal loan can help lower your credit card debt, it’s still debt. Ensure you can handle the monthly payments comfortably; missing payments could harm your credit score further.
Avoid Falling into Old Habits
Once you consolidate credit card debt, resist the urge to rack up new balances. Otherwise, you may end up back where you started—with high credit utilization and a damaged score.
Seek Professional Advice
Before opting for a personal loan to improve your credit score, consider consulting a credit counselor or financial advisor. They can assess your financial situation and guide you toward the best decision based on your income, expenses, and overall debt.
By strategically using a personal loan, you can lower your credit utilization ratio and boost your credit score—but only if it’s the right move for your unique financial situation.