One of our readers, Christine, sent us this question:

I have a FICO score of 824. I have credit card debt totaling $27,000. I would like to get a personal loan for $30,000(I found a good offer with a low rate and no pre payment penalties) and pay it all off. I would not get rid of my cards but I wouldn’t use them either. Will paying these off hurt my score?

Thank you for your question Christine!

Paying off your cards will never hurt your credit score. In fact, it is probably the best thing you can do as far as your scores are concerned.

I am a little worried that the first month you do this you may see your score drop for this reason: You took out the personal loan, and then paid your cards off. However in any given month your credit card companies will report the amount charged on your card for that month – even though you paid it off.

So, it will look like you took out the personal loan, and had a balance on your cards, but only for that first month.

I would say that after the first month, you can expect your score to go right back up. Since you have such excellent credit I doubt that even having both types of loans show up that first month will really hurt you. Credit bureaus and lenders are not nearly as skittish about people with excellent credit borrowing more money!

Getting the personal loan is a great idea because you will only have to make one payment, have one interest rate to deal with, and one bill to focus on paying off.

How exactly will it affect your credit?

The credit bureaus like to see that you are using less than 30% of the total amount you have available to borrow. In fact, the lower that number, the better. So, when you pay all of your cards off your score will go up. As long as you do not continue to charge on your credit cards, then you should not have any ill effects.

You are very, very smart not to close the paid off credit card accounts out. Closing those old accounts out would cause your score to plummet. It would actually look like you were approaching 100% of your borrowing capacity instead of well under 30% so just be careful. If you do find that you need to close any of those accounts while you are still paying off your personal loan, try to only close out the newest accounts, or the ones with the lowest limits.

I wish that I could tell you for certain how this will affect your score, but I can’t. FICO only gives general breakdowns and outlines for the way scores are computed – not specific numbers (i.e. doing this will drop your score this many points) So. If I were you I would monitor all three of my credit reports and scores for a couple of months, just to be on the safe side. The best deal that I have found is through TrueCredit. Right now it’s $14.95 a month for all three credit reports and scores. I use it, and I’ve been very happy with it.

I would say, that as a worst case scenario, just don’t plan to open any other new accounts, close any old accounts, etc. for about 6 months. If your score does take a small initial hit, then it will definitely recover in that period of time because you will no longer be carrying revolving balances.

Thanks again for your question, and good luck!
Jenna

This entry was posted on Monday, July 21st, 2008 at 09:45 and is filed under Reader's FAQ. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.