Should I take out a personal loan to consolidate my debt in order to help my credit score?

[Anonymous]

I am fresh out of college and I have around $20,000 in debt across all of my credit cards... My credit score seems to be suffering due to high utilization rates of my cards..

I currently have 3 cards which are essentially maxed. 2 of them are charging interest. 1 of them is charging interest on $1000 of the $4000, as the other $3000 is on promotional balance which will be ending in August ($1000) and January ($2000). 

I have another card which is almost maxed ($2500 limit, about $600 credit left), also charging interest. 

I have never had late payments and always pay at least the minimum. I have one other card which I use currently and I always pay off in full, but I generally don't have enough money to pay more than the minimum on the other 4 cards. 

My FICO credit score right now is at a 620. I have an offer from Upstart to take out a $20,000 loan which will cover the balance on all of my cards, and I will be paying just $500 a month, which is close to paying just the minimums on all of the cards.

According to CreditWise, I have a 75% utilization of credit, if I pay off these cards, I'm sure that number will sink. and I am assuming that will sky rocket my score?

I am confident that if I take out this loan, I will maintain no more than 30% usage across all of the cards. I will also be getting a full time job soon, so I will be getting more to ensure I am not racking up debt again. 

Will paying down completly all of my cards (especially those that have near max utilization) raise my credit score, or will taking out the personal loan lower my credit score?

I have heard that initially there will be a dip, but in the long term it will shoot up my credit score once the balances on all the cards are $0 and I don't miss any of the loan payments. 

Questions:

1. Am I better off paying off all of my debt with the personal loan, or am I better off just maintaining the current debt which I have and just paying it off when I can?
2. If I do decide to take out the loan, should I also pay off the debt that I have in the "promotional" balances or only pay off the debt that is charging interest?

Would appreciate any advice. The last thing I want to do is take out this personal loan and my credit score sink under 600...

[cjane1]

You are still going to get charged interest on a personal loan, maybe more that what you are paying now on your credit cards and will  take you years to pay off with the offer they are giving you.  When you get your full time job, keep paying the minimum on all the cards but one, make extra payments each month and before you know it you'll have it paid off then go to the next card. 

[Anonymous]

The first question to answer is, which has better interest rates?  If your credit card is 9.9% and your personal loan would be 14.9%, then it is better to continue paying interest with the credit card company and start attacking the balances vigorously once your new income kicks in.  If the personal loan's interest rate is lower, then borrowing those funds to pay off the other ones makes more financial sense in the long run.  Minimize the amount of interest you will pay on the debt overall, never mind who you are paying the interest to.  A good credit score is important, but in the end saving yourself real money in interest payments is just as important.

If the interest rates are basically the same (within a point either way, for example), then you can consider part two - what is the possible increase in credit score worth to you over the next five years or so?   Lowering your usage (paying off most of your accounts, leaving a balance on one that is relatively small compared to where they are now) will gain you some FICO points.  Taking on the installment loan (personal loans are installment loans) will possibly cause an initial dip of a few points, but that should dissipate in 6 months or less, giving you a net gain in points.  How many points?  That depends on the rest of your file.  Any late payments on anything (loans, credit cards, etc), or too many inquiries, or short credit age, or any past collections - these things will affect how "fluid" your score is, that is, how much a single event like an improvement in utilization can affect it.  You will gain, but maybe not as much as you think - and maybe not even as much as you could gain by attacking your debt and credit profile in other ways.  If the interest rates are similar, then yes, you should consider this option if you need to quickly pay off credit cards and can comfortably manage the loan payment.  If you do not foresee needing your credit score to be optimized (for a car or house purchase, for example) in the next 3-5 years, then you have to determine if you want to be obligated to a loan payment, or if you could more efficiently manage payoff with your increased income (making larger monthly payments) without needing the loan.

Credit card consolidation through a lower-interest loan (lower than the credit card rates) makes sense in many cases.  With a young file like yours, it could also add an installment debt to your profile which could help you getting other installment loans in the future (like car financing).  It isn't ideal for all situations, though, especially if the math on the interest doesn't compute.  I have used them myself in the past, and typically gained a dozen FICO points or so in the process through eliminating almost all utilization (never zero yourself out) vs. the impact of a new loan, but I have a pretty thick (20-year-long) file.

[Anonymous]

Be aware that in most cases of debt consolidation loan, the borrowers end up with maxed out cards in well under a year AND a loan to carry and then post asking about filing BK.

If you can't cut your spending TODAY and for the next 2 years, the loan will hurt you more when you max out double balances.

Can you cut spending, for real?  Turn off cable, downgrade your cell phone plan, stop buying consumer goods you don't absolutely need?  Do that for 6 months and if you can stick to it, then get a personal loan.  If you can't do those things, be ware of what generally happens to people who consolidate debt!

[Anonymous]

Thank you everyone for all of your insightful responses. 

My overall goal is to raise my credit score as fast as possible. I do want to be able to do a multitude of things in the future (2-5 years) that will involve credit such as buying a car. From my overall calculations, the average interest across all of my credit cards comes out to be actually a point to two points less than the personal loan. However, at this point, I have a total of 5 credit cards, and I am essentially paying the minimum on 4 of them (which nearly add up to $300), and then I am paying one of them off completly. 

To this point, I have been able to fully manage doing the above. I am offered a $20,000 loan from Upstart over 5 years almost $500 a month, which if I accept will clear all of my debts. So even if I am paying a premium to get the loan.. I see the benefit in that I will be doing a few things for my credit. I will drop my utilization rates, and I will practice keeping all of them under 10% by using all of my cards equally, and only using the amount that I can pay off. Also, I will be adding a personal loan into my "credit mix" which will help my credit score as well, and the consistent payments of the loan should give me more reputation going forward to future installment loans. In addition, I feel I am the type of person, that when I know I have to pay X amount of dollars at the end of the month, it will prevent me from spending the money. I feel that I budget better under this kind of circumstance. 

In addition, I am about to get a 2nd source of income in the next month or two. So I will be able to easily cover the $500. UpStart will let me pay off the loan at any point as well, so at least this way, my main concern straight out of my job won't be dishing out all of the money I am earning to debt, but instead financing it over time. 

[cjane1]

Can you afford $500.00 a month for the next 5 years?  As of now you are only paying 300.00 a month and additional on 1.. You seem to have changed your way of thinking and have a plan, paying more on 1 card until it's paid off then focusing on the next card, you see progress and makes you more determined. If you stick to it, you could have the cards paid off within a year or two....

Shred the credit cards so your not tempted to use them..