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Will I be declined for an installment loan with a fair credit score?

Summary

An installment loan with a low APR could help you pay down high-interest card debt, but it could also damage your score if you are declined. Consider transferring balance to an existing 0-percent card instead.

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Question

Dear Credit Guy,
Recently, I’ve racked up some balances on two credit cards. The problem I’m running into is the interest being charged on one of the cards (the other one is still 0 percent). My credit score is below 650 now because of the revolving balances.

I’d like some advice as to whether I should apply for an installment loan to transfer the balance from that. I’m afraid that this would severely damage my credit or, even worse, that I would get declined AND my credit would be hit hard. What’s the best route? – Natasha

Answer

Dear Natasha,
I am not really a fan of trading one debt for another, unless you can take advantage of an attractive interest rate. For instance, an installment loan that offers a substantially lower interest rate than you are paying on your credit card could be a solution for you.

However, you are right to be concerned about how applying for more credit will affect your credit score.

  • Any time you apply for credit, your credit score will take a ding of a few points by the hard inquiry to your report.
  • In addition, your score has already taken a hit because of your high credit utilization ratio, as you have, in your words, “racked up some balances.”

Your worry about being declined is also warranted, due to your recent activity. I’m not saying you would definitely be denied, but it is certainly a possibility. If that were to happen, you would still take the hit from the hard inquiry, and you wouldn’t be any closer to taking care of this debt.

Balance transfer to 0-percent card
Another option that would not require you to have your credit pulled would be to transfer the balance from the card with high interest to your 0 percent APR credit card.

  • This would require you to have enough available credit to make this transfer.
  • Be aware that you would probably have to pay a balance transfer fee, generally about 3 percent of your balance.

But if you have the available credit, this could be a great solution. Even if you have to pay the 3 percent to transfer your balance, you would come out ahead if you can pay off the balance before your 0-percent interest rate expires.

In this case, it might even be worth transferring a portion of the debt to your 0-percent interest card up to the amount you have available.

  • The remaining amount on your card should be your top priority to pay off, since the interest rate is high.
  • However, you must not neglect your 0-percent interest card, since that rate will not last forever.
  • You will need to determine the amount you need to pay each month to pay off your card before the rate expires. CreditCard.com has a 0-percent balance transfer payoff calculator that can help you figure that out.

Perils of high-interest card
If you decide to move ahead with a loan and are able to secure a low-interest loan, I don’t want you to be tempted by the available credit you will open up on the existing credit card.

  • You need to remember that the interest rate on your card is high. Try to only use the card for purchases you can afford to pay off when the bill comes.
  • If you can do that, you will see your credit score improve over time and, more importantly, you will stay out of debt.

See related: Ways to pay off high-interest debt

Video: What is a balance transfer credit card?

See related: High installment loan utilization hurts your credit score 

Whatever you decide to do, you must determine a way to pay off these balances. It takes discipline to refrain from using credit to supplement your income, but it’s absolutely crucial for your overall financial health.

Take a hard look at your monthly income and expenses with an eye toward cutting any expenses you can in order to free up more available cash to pay toward your debt. Your credit score – and you – will be that much better at the end.

Take care of your credit!

 

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Published: May 13, 2017

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