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Loan may be used to pay down debt, improve credit score
By Sam Craine on May 27th, 2010
A debt consolidation loan may be an option for consumers who want to reduce what they owe on their credit cards.
Reducing the amount of debt they carry on plastic can help improve a credit score, as utilization ratios are taken into account. Recently, financial expert Liz Pulliam Weston received a letter from a reader who was offered a $5,000 loan from their financial institution, which they planned to use to pay off credit card debt.
Then the plan was to use $2,000 of the loan to pay back the principle on it. The reader was curious as to whether taking the loan could end up hurting a credit score even if credit card balances are reduced.
"The credit scoring formula isn't as sensitive to amounts owed on installment loans, however, so there's no real need to borrow more money simply to pay it back and lower your balance owed," Pulliam Weston wrote.
One benefit taking out a loan to reduce credit card debt can present is giving a consumer a lower interest rate than is offered on their current account. As a result, they may pay less over time.
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