3 credit cards= $7075. Will using my unsecured $10K loan to pay them at once or over time raise my fico score?

Question

My fico scores average 660. APR's on the cards are 14.24-22.24% and my secured loan has a 13.95% fixed APR. I took out the loan to cover $1800 for surgery expenses that my health insurance would not cover because of no available credit on any cards. When I was approved for the loan, I asked the loan officer to raise the it to $10,000 so I can use it to pay off credit cards by consolidating the debt. The loan's monthly payment is $235 for 5 years. My credit card's monthly payments are $320. Once the cards are paid off, I will save $85/month and only have one monthly payment to make. My main concern is: 1) Will paying the cards off all at one time hurt my fico score, if so, how should I pay them off over time? 2) Should I keep the cards open to show a low balance to credit limit ratio? 3) Or- should I close any of the cards and/or lower their credit limits? 4) Will having an unsecured $10,000 loan hurt my credit limit to balance ratio? 5) Will having the loan hurt or help my fico score?

Answer 1

Assuming that it is just what you said, a loan & not a line of credit, that means you are already paying back the $10k every month. Does this mean that you have it all sitting in an account? But anyways... pay off the cards & leave them open for your reason #2.

As for #4, you have already done what will be done to your credit by taking out the loan. You will only help the situation by paying off the cards b/c on your credit, it now shows you owe $17,075 ($10k loan + $7075 in cc). Had it been a line of credit, the difference would be minimal b/c it would show that you still owe $7075, but just to the line instead of the cards. And you would have the $10k limit on it.

AS for #1, if you have had them for a little while, just pay it off, you have plenty of history & you now have the loan.

Good luck

Answer 2

First, your rates are relatively high. Have you attempted to request the companies to lower their rates? You can threaten to close the account if they don't. Go to http://www2.oprah.com/money/debtdiet/steps/debtdiet_steps_03_b.jhtml for a script. Better yet, do you get those 0% APR offers in the mail? This is even better, allowing you to pay only a one-time 3% transfer fee vs the monthly interest. If this is not an option, using the loan would be better than paying the additional interest.

For your questions:
1) Paying the credit cards at one time will actually help your score. Credit card debt has the worst affect on your score than any other type of debt w/the exception of collection accounts.

2&3) Keep the cards open and do not lower the limits as long as you can manage to purchase 1 item with each card (groceries, gas, etc) and pay it off in full before the due date. This keeps the accounts active. If you feel you can run the risk of charging the cards again, then I would keep the oldest card open and close the other two.

4&5) The loan may initially hurt your score. But you have to remember that before you had the loan, your debt to credit ratio was much higher b/c you had $10k less in available credit. Over the next 5 years, paying down the loan will help your score. So, as your credit score rises you may be able to apply for new credit with better rates lower than 13.95%.

Answer 3

I think that the answers that have been given so far are good. I would add one thing. You need to look at why you have over $7,000 in credit card debt. This is not a judgment call just a question. What are your spending habits?

Generally what happens to people is they consolidate their bills and then go back out and run up the credit cards again. This is a vicious cycle. The fact that you are acknowledging this is a good thing. So if you do consolidate the credit cards then by all means cut them up except the one with the lowest interest rate and then take it out of your wallet and put it away. If it is not easy to use then you will have to think twice about the purchase. I would also continue making the $320 if you can afford it. This will pay the loan off sooner and reduce the amount of non-deductible interest that you are paying. Each additional principal payment saves you 13.95% on your "investment" Where else are you going to earn that kind of money? The other alternative is to put the savings ($320-235) into a saving account and in effect pay yourself. Then, when you want that next "toy" you will have the cash for it instead of having to borrow, which cost you more in the long run.

The one think that is missing from your question is what is your real long term goal? Lower interest rates? The purchase of a home? Keep that goal in sight and you will make it a reality. Best of luck to you.

Answer 4

1) Paying off the cards all at once should not hurt your FICO score because you are reducing your balance to credit limit ratio on all your credit card accounts.

2) I would keep one credit card account open (i.e., the one with the lowest APR) and close the other two by paying off the balance in full. Pay off a significant portion of the balance for the card with the lowest APR. I would then call the credit card company and ask to have them lower your APR so that your interest payments are a little more manageable. Threatening to transfer your balance to another credit card company should allow you to get the drop in interest rates you need.

3) Again, I would keep the one credit card open while closing the other two. If you feel that by lowering the credit limit on the open remaining credit card will make you less profligate in your spending, then that's what you should do.

4) A loan is not like a credit card balance, so again, having the unsecured 10,000 loan should not hurt your credit limit to balance ratio.

5) Having the unsecured loan shouldn't necessarily hurt or help your FICO score because you're using the loan proceeds to pay off credit card debt. You're basically swapping types of debt (credit card to unsecured).

To ultimately answer your question, I would think using the unsecured loan to pay off your credit card debt at once would slightly raise your FICO score, not lower it. Hope this helps...good luck!

Answer 5

Whether you have the cards charged up or not, counts toward your score. In other words, if you have a credit card with a $5000 dollar limit, but you only have $500 charged on the card, you have a potential of $5000 debt, which cann affect our score. That is my understanding anyway. If you can afford it, I would just pay them off close the accounts on one or two of the cards or have the limit lowered.