Make sure loan consolidation improves your credit


Credit Smart
Credit Smart columnist Susan C. Keating
Susan C. Keating is the president and chief executive officer of the National Foundation for Credit Counseling. Prior to joining the NFCC, Keating spent 29 years in financial services. She was the highest ranking female CEO of a U.S. bank holding company, serving as president and chief executive of Allfirst Financial Inc., the largest U.S. holding of AIB Group. She currently serves on Bank of America's National Consumer Advisory Council and is a board member of the Council on Accreditation. Keating also participates in the Financial Regulation Reform Collaborative, a nonpartisan group committed to finding solutions for reforming financial services regulation.

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Dear Credit Smart,
I want to combine all my credit cards with a loan but don't want it to affect my credit and want to keep my credits cards. – Ele


Dear Ele,
What you want to do is understandable but not possible. There’s no way around it: Using your credit will affect your credit, and you propose to use it. However, if decide to move forward with your plan, I do have some advice for the best way to go about it to assure that in the long-term, that affect will be positive.

The first thing I would suggest you do is pull a copy of your credit report for yourself so that you know exactly what is on there now. You can do this for free at  Look over your report carefully and if you find mistakes, be sure to report them. You want your reports to be in the best possible order before you take out your loan. One thing to note is that you will not get a free score from this site. A growing number of credit cards offer free credit scores, including Discover, Chase and Capital One. If you have a card that does offers this, take advantage of that service as well. Knowing what your starting score is, before you get your loan, will help you as you move ahead.

Now let’s talk about how new credit affects your credit score.  Your score is made up of many moving parts, and one of those parts is new credit. Just applying for the loan will most certainly affect your credit, because that will trigger a hard credit inquiry. Then the actual loan will be added as new credit to your entire credit portfolio.  Initially, taking out the loan will probably cause your score to dip somewhat. Much will depend on the other information in your credit report.

Additional factors that make up your score include your payment history, especially over the past 24 months or so. On-time payments are what count the most.  The age of your accounts is important as well, so your decision to keep your credit cards open will help in that category. Closing accounts, just like opening new accounts, can cause a temporary dip in score. But using your loan to pay the accounts down to or near a zero balance will help in the credit utilization portion that shows both how much credit you have used and how much credit you have available. Keep in mind, though, that the loan you take will count as 100 percent utilization of that credit.

So taken as a whole, it could be that the factors will balance out and your score will only slightly be affected, it at all. What you do after you get your loan is what will be most important to protecting your credit score. As I said earlier, on-time payments are most important. This means you must pay your bills – all of your bills – on time, every time.  

Finally, I want you to know the best way to use your credit cards once you have paid them off via the loan. Since you are not closing them, you are going to have a fair amount of open credit available and that can be very tempting.  While it is important to use the cards so that the creditors don’t close the accounts due to inactivity, the best use of your credit cards will be to only charge amounts that you can pay off in full and on time within the billing cycle. This practice will keep your accounts current and active, as well as keeping you from accumulating more debt. Ultimately, this is best for your overall financial health.

Remember to always use your credit smarts!

See related: 9 things to know about debt consolidation

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Published: September 3, 2016

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Updated: 10-26-2016

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