The balance on one of my credit cards is so high that making payments has been difficult. What's the best thing to do with minimal damage to my credit score? Should I take out a personal loan and pay it off without having to close the account or should I still keep the account open but only make payments I can afford, which would be less than the minimum amount due each month?
Making your payments on time every time is the most important factor in your creditworthiness. Making less than the minimum payment due will likely result in the account being reported as past due on your credit report, which will negatively impact your credit scores.
Using a Personal Loan to Pay Off Your Credit Card Can Be Beneficial
If you are struggling to make the payments, or if repayment is difficult due to high interest fees, taking out a personal loan with a lower interest rate and using it to pay off the credit card balance in full may be a good option. If you qualify for a loan with a low interest rate, it could mean lower payments, which can make it easier to ensure all your payments are made on time.
It may also mean you will have more money left over to put towards the loan balance in order to pay the loan off more quickly, or to use towards making sure your other bills are paid on time as well.
Consider the Terms of the Personal Loan Before Making Your Decision
However, before you use the funds from a personal loan to pay off credit card debt, you will want to consider not only the interest rate, but also the length of the loan. Payments may be lower, but depending on the terms of the loan, it could take you longer to repay the debt.
Lower interest rates but a longer repayment term could cost you more in the long run, but it could also help you protect your credit history.
Deciding Whether to Keep the Credit Card Account Open
If you do decide to use a personal loan to pay off the balance, you shouldn't automatically close the credit card account once the balance is zero. Closing your account reduces your overall available credit, which can affect your utilization rate, or balance-to-limit ratio. A higher ratio can have a negative effect on your scores. In addition, depending on the age of the credit card account, closing the account could negatively impact your length of credit history, which is factored into your credit scores.
On the other hand, if keeping the account open represents temptation and the urge to charge again, then closing it may be the best option. The answer depends on your personal circumstances.
Whether or not you close the account, the important thing to remember going forward is that credit cards should never be used to spend more than you can comfortably afford to pay back.
Once you pay off the debt you've already incurred, your goal should be to pay off any balances on your credit cards in full each month. Doing so not only helps you avoid spending your hard-earned money on interest, but it shows you know how to use credit wisely, which in turn helps your credit scores.
Thanks for asking,
The "Ask Experian" Team