Credit Card Payoff Loans Can Provide Lasting Help
New data from TransUnion finds that most people who consolidate credit card loans see improved credit scores after a year.
Most consumers who use a signature loan to consolidate their debts from credit cards and other consumer loans end up with higher credit scores a year later, according to a study released Wednesday by TransUnion.
The Chicago credit reporting agency undertook the study to determine whether consolidations by signature loans really help consumers, said Liz Pagel, senior vice president and consumer lending business leader at TransUnion.
“Do they take a debt consolidation loan, pay off most of their credit cards then run up their credit card balance right away, and get themselves deeper and deeper in debt?
“Or, does it do what the consumer advocates hope that it would do, which is to get them into a more steady payment schedule that’s more predictable and help them chip away at their debt?,” Pagel asked.
The answer is that it does help— at least for most, and at least for a year, which was the window of the study.
Debt consolidators pay down an average of 58% of their credit card debt with the new personal loan, bringing average credit card balances down from $14,015 to $5,855. As a result, most saw their credit scores improve.
The researchers compared one group of consumers who consolidated their loans with a control group who did not. Over the next year, the difference in rates of improvement (defined as an increase of at least 20 points in their VantageScore over a year) was about 50 percentage points for consolidators in the subprime to prime credit tiers (300 to 720), with higher tiers showing less improvement.
Improvement rates by tier were:
- Subprime (300-600): 84% of debt consolidators improved versus 35% for those who did not
- Near Prime (601-660):77% v. 22%
- Prime (661-720): 68% v. 18%
- Prime Plus (721-780): 51% v. 13%
- Super Prime (781-850):15% v. 1%
Small minorities ended up with scores that worsened by at least 20 points. The percentage whose scores fell ranged from a low of 2% for Subprime to 12% for Superprime.
Many consumers are starting to shift toward streamlining their bills into a single monthly payment, rather than juggling multiple credit card payments, Pagel said.
“Personal loans offer a predictable payment plan with set terms and fixed rates,” she said. “Not only does debt consolidation make paying bills more simple, but more importantly it often results in a credit score boost for some individuals.”
TransUnion also found the consolidators were more likely to obtain a new auto loan or credit card following consolidation, and they originated mortgages at a higher rate within a year.
Consolidators showed fewer past due accounts than non-consolidators over the year, including fewer 90 days or more past due.
NCUA-insured credit unions held $44.4 billion in unsecured loans as of June 30, up 8.3% from a year earlier. The NCUA classification, which excludes credit cards, private student loans, and Payday Alternative Loans, accounted for 4.2% of total loans.