Can Paying off Personal Loans Help My Bad Credit

When you have personal loans, bad credit is something that you may be worried about. Bad credit can keep you many financial opportunities. It can prevent you from buying a house, a car, or anything else with credit. If you already have debt in the form of personal loans, you may be wondering if you can help your credit by paying them off. Here are a few things to consider about your personal loans and your credit score.

Paying off Loans

Paying off your personal loans will have an impact on your credit in some way. Whether or not it helps you significantly will remain to be seen. However, one key area of the formula that determines your credit score is the amount of money that you have on accounts. Credit bureaus like to see that you have your debt situation under control. When you have several accounts maxed out to their full credit limits, it can reflect negatively on your credit score. 

Each person has a certain limit to how much money that they can borrow. This number is derived by your credit score and your income level. Lenders use debt to income ratios to determine exactly how much you can borrow. When you reach this amount, you cannot borrow any more money until your credit amount is decreased. 

If you pay off your loans early, this frees up additional credit that can be used. When you have credit available and do not use all of it, this reflects positively on your credit score. This shows that you have self-control when it comes to financial matters and can be trusted with future loans. When you look like a good borrower, lenders will be much more likely to give you the money you need.

Other Considerations

While it can help you to a certain degree, it could also end up negatively affecting you as well. Credit bureaus love to see that you are making payments on time every month. In fact, up to 35% of the formula that determines your credit score is determined by whether or not you make your payments on time. If you pay off all of your personal loans at once with a lump sum, it will remove your ability to make monthly payments. If you pay off all of your accounts early, the credit bureaus will not look as favorably on you as someone that is making on time payments.

The Verdict

Deciding whether or not to pay off your personal loans early is a personal decision. If you pay off all of your loans at once, it can hurt your ability to make on time payments, and in turn, help your credit. However, if you pay off part of your total debts, it can increase the amount of money that you have available to borrow. 

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