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Using Personal Loans to Pay Down $5,000 or More in Credit Card Debt Raises Credit Scores by Average of 38 Points

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Paying down credit card debt is one of the primary reasons people take out personal loans. And while it may seem a bit like robbing Peter to pay Paul, it can be a savvy financial move that pays off in more ways than one.

Not only do borrowers benefit from fixed monthly payments at a (typically) lower interest rate, but their credit scores also often get a boost — and a pretty significant one at that — thanks to revolving credit utilization rates, which can comprise as much as 30% of credit score algorithms.

Our latest study compared the credit scores and credit card balances of more than 1,500 anonymized LendingTree users one month before a personal loan was originated and the next month when it appeared on their credit report. We found significant credit score boosts all around, no matter the amount of credit card debt paid off with a personal loan.

Key findings

  • Using a personal loan to pay down credit card debt can boost your credit score substantially. According to a LendingTree analysis, consumers who used personal loans to pay off at least $5,000 in credit card debt saw their credit scores rise an average of 38 points between the month before the loan was originated and the month after, when it first appeared on their credit report.
  • The more credit card debt you pay down with a personal loan, the higher your credit score jumps. While most people would assume this, it’s helpful for consumers considering this to see the average changes. For example, paying down $10,000 or more in credit card debt with a personal loan increased credit scores by an average of 49 points.
  • Paying down lower amounts can still net a double-digit credit score increase. Our analysis showed paying down between $1,000 and $5,000 in credit card debt with a personal loan netted borrowers an additional 17 points, on average, in a single billing cycle.
  • Average personal loan rates are almost always lower for borrowers with solid credit scores than the APRs they could receive for credit cards. As a result of this (looking at a hypothetical), a personal loan borrower with a good or excellent credit score of 720 or more could save 14% by paying off a $5,000 personal loan in three years compared to paying off $5,000 on a rewards credit card in the same period.

 

Credit scores

In this study, we’ll touch on the factors that affect credit scores and what a good score is, so here’s a high-level introduction.

Factors that impact a credit score

For a FICO Score
  • 35%: Payment history
  • 30%: Amounts owed
  • 15%: Length of credit history
  • 10%: Credit mix
  • 10%: New credit

 

For a VantageScore
  • Extremely influential: Payment history
  • Highly influential: Type and duration of credit, credit limit used
  • Moderately influential: Total balances/debt
  • Less influential: Available credit, recent credit behavior and inquiries

Credit score ranges

For a FICO Score
  • 800 to 850: Exceptional
  • 740 to 799: Very good
  • 670 to 739: Good
  • 580 to 669: Fair
  • 300 to 579: Poor

 

For a VantageScore
  • 781 to 850: Excellent
  • 661 to 780: Good
  • 601 to 660: Fair
  • 500 to 600: Poor
  • 300 to 499: Very poor

How much paying down credit card debt with personal loans can boost credit scores

Quick and substantial — that’s the kind of boost credit scores see when consumers pay down their credit card debt with a personal loan.

Our latest study compared the credit scores and credit card debt of anonymized LendingTree users one month before a personal loan originated to credit scores and credit card debt one month later. While we found the credit score boost increased with the amount of debt paid down, we found the boost was significant — we’re talking two figures across the board in just one billing cycle — even when the amount of debt paid down is at the lower end of the scale.

The impact is due to credit score algorithms, which are impacted significantly — up to 30% — by revolving credit utilization rates (Your credit utilization ratio is the sum of your credit card balances divided by your credit card limits.) Taking out a personal loan alone — say that five times fast — can impact one’s credit score, too: A consumer’s credit mix and new credit are also included in credit score algorithms, though they’re less impactful (about 10% each).

How much can consumers expect to see their credit scores jump after using a personal loan to pay down credit card debt? As we said, it depends on the amount of debt paid down. However, those who used personal loans to pay off at least $5,000 in credit card debt saw their credit scores rise an average of 38 points in one billing cycle.

It makes sense that those who paid more saw a bigger jump — an average 49-point jump for those paying down $10,000 or more in credit card debt with a personal loan. But even those who paid down less still saw a double-digit jump in their credit score — an average increase of 26 points for those who paid down $1,000 or more in credit card debt with a personal loan.

Those who went really big — paying down $25,000 or more in debt with a personal loan — saw an average credit score jump of a whopping 72 points.

How using a personal loan to pay down credit card debt impacts your credit score

Amount paid downNovember credit scoreJanuary credit scoreAverage change
$1,000 or more65768326
$5,000 or more66670438
$10,000 or more66171049
$15,000 or more66171453
$20,000 or more65272068
$25,000 or more66073272

Source: LendingTree analysis of credit scores and credit card balances from more than 1,500 anonymized LendingTree users whose only personal loan appeared on their credit reports in January 2022.

Is a boost in your credit score a substantial deal? You bet it is, says Matt Schulz, LendingTree chief credit analyst.

“A higher credit score is a big, big deal because there are few things in life that are more expensive than crummy credit,” he says. “It can cost you thousands of dollars in the form of higher interest rates on loans, higher insurance premiums and more. It can even keep you from getting that new apartment you’re hoping to rent.”

Paying down less credit card debt? Your score will still rise

To get more specific, we looked at the impact of paying off various ranges of debt with a personal loan, finding that the credit score needle moves quite nicely at nearly all levels.

For example, those who paid off $1,000 to $4,999 of debt with a personal loan saw a 17-point increase in their credit score. That increase jumped to 28 points for those who paid off $5,000 to $9,999 in debt with a personal loan and 45 points for those who paid between $10,000 to $14,9999.

How using a personal loan to pay down credit card debt impacts your credit score

Range paid downNovember credit scoreJanuary credit scoreAverage change
$1,000 to $4,99965166817
$5,000 to $9,99967069828
$10,000 to $14,99966170645
$15,000 to $19,99967170736
$20,000 to $24,99964470864

Source: LendingTree analysis of credit scores and credit card balances from more than 1,500 anonymized LendingTree users whose only personal loan appeared on their credit reports in January 2022

So what gives with the rise being higher for people in the $10,000 to $14,999 range than for those in the $15,000 to $19,999 one? Schulz says there’s no one answer, but it could have to do with who’s most likely to borrow those large sums.

“Banks are most likely to make the biggest loans to folks with the highest incomes and the best credit scores,” he says. “These are probably folks with significant experience with lenders and at least a few other items on that credit report. Those folks have a lot of other data points on their credit report that are influencing their credit score, so one change, even a big one like paying down all that debt, may not be as impactful for them as it would be for someone newer to credit.”

According to Schulz, it often doesn’t take much of a boost to make a big difference in your financial life.

“Sure, a jump of 50 to 100 points would be amazing and could really move the needle, but depending on your individual circumstances, a move of just 10 to 15 points or so can be significant,” he says. “That’s especially true if your score is just on the cusp of a higher range. For example, a move from 685 to 700 could open doors and lead to lower rates. Rising from 710 to 725 can be the difference between good and great. It doesn’t take much to have an impact.”

Hypothetical: Paying off a personal loan versus paying off a rewards credit card

Of course, all debt — personal loans included — must be paid off at some point. But should paying off the loan be your priority over other debts? The answer depends partly on your credit score — we told you that score’s important, right? — but also on the interest rates of your other debt. In most cases, it’s hard to beat the rates of personal loans, especially if your credit score is high.

For example, rates for personal loans are almost always lower for borrowers with good or excellent credit scores than the APRs on rewards credit cards. The average personal loan APR for someone with a credit score of 720 or higher is 5.52%, while the minimum rewards credit card APR in May 2022 is 15.91%.

For a $5,000 balance over three years, you’d pay $883 more to pay off the credit card balance than the personal loan. With a $10,000 balance, the difference jumps to $1,767.

Even for those with lower credit scores, the difference is significant. Someone with a fair to good credit score of 660 to 679 would pay $475 more over three years for a $5,000 credit card balance than they would for a $5,000 personal loan balance, and $937 more for a $10,000 credit card balance over three years.

Hypothetical: $5,000 credit card balance vs. $5,000 personal balance (3 years)

Credit scoreAverage personal loan APRMonthly payment for 3-year loanTotal amount paidExample credit card APR (rewards)Payments to pay off in 3 yearsTotal amount paidDifference between personal loan and credit card over life of loan% difference
720+5.52%$151.02$5,436.7215.91%$175.56$6,320.16$883.4414.0%
680-71913.13%$168.78$6,076.0819.65%$182.25$6,561.00$484.927.4%
660-67916.89%$177.99$6,407.6423.38%$191.19$6,882.84$475.206.9%

Hypothetical: $10,000 credit card balance vs. $10,0000 personal balance (3 years)

Credit scoreAverage personal loan APRMonthly payment for 3-year loanTotal amount paidExample credit card APR (rewards)Payments to pay off in 3 yearsTotal amount paidDifference between personal loan and credit card over life of loan% difference
720+5.52%$302.05$10,873.8015.91%$351.13$12,640.68$1,766.8814.0%
680-71913.13%$337.57$12,152.5219.65%$364.19$13,110.84$958.327.3%
660-67916.89%$355.98$12,815.2823.38%$382.02$13,752.72$937.446.8%

What about zero-interest balance transfer credit cards? If you can pay the balance off on time, they may be the one exception to the rule. However, not everyone qualifies for these cards, and if you can’t pay off the balance during the introductory rate time frame, the interest rate typically jumps significantly.

Should you use a personal loan to pay down credit card debt?

There are benefits to paying off credit card debt with a personal loan if the situation is right for you. In addition to a higher credit score, a personal loan can help streamline your finances. The right loan can allow you to consolidate multiple loans into one payment, shortening your to-do list and simplifying your life.

The biggest motive, however, should be to eliminate debt — so you want to make sure you can pay off the loan timely.

“Eliminating that debt can be nothing short of life-changing,” Schulz says. “It can free you up to build an emergency fund, save more for retirement, work toward buying a home or paying for your kids’ college. It’s a big, big deal.”

How to use a personal loan to pay down credit card debt

If you’re interested in taking out a personal loan to pay down credit debt, here are a few tips that can help.

Step No. 1: Shop around

It’s crucial to shop around for your best personal loan and not just settle for the first one you see. Different lenders can — and do — offer different terms. In addition to the lowest APR or preferred repayment term, be sure to factor in any fees.

Step No. 2: Receive and distribute your funds

Once you apply for the loan of your choice and it’s approved, you’ll receive the funds. At that point, you can use the money to pay down (or pay off) your credit card debt. If you can’t pay all your debt off with the loan, strategize so you pay off those with the highest interest rates first.

Step No. 3: Learn from your mistakes

Once you pay down your credit card debt, do everything you can not to rack up anymore. Stay within your budget and pay your balance off each month if you use your credit cards.

Step No. 4: Pay off your personal loan promptly

Even if your personal loan’s interest rate is low, interest is still accruing. Do everything you can to pay it off as soon as possible so you can invest money and earn interest rather than paying it.

Methodology

LendingTree researchers compared the credit scores and credit card balances from November 2021 credit reports to the credit scores and credit card balances from January 2022 credit reports for more than 1,500 anonymized LendingTree users whose only personal loan appeared on their January 2022 credit reports.

These personal loans generally originated in December and first appeared on credit reports in January 2022. Only people who paid down at least $1,000 in credit card debt between November 2021 and January 2022 were included in this analysis.

For the hypothetical, average personal loan APRs are based on LendingTree users who closed a personal loan with the intent to refinance their credit card between March 1, 2022, and May 31, 2022. Average credit card APRs are based on a monthly LendingTree examination of online terms and conditions for about 200 credit cards from more than 50 issuers, including banks and credit unions.

 

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