How does a personal loan affect my credit utilization ratio?

Credit utilization defined: Credit utilization = total revolving credit balances / total revolving credit limits. Only revolving credit accounts (credit cards, personal lines of credit, HELOCs) are counted. Installment loans (personal loans, auto loans, mortgages, student loans) are NOT included in the utilization calculation. A $20,000 personal loan balance has zero effect on your credit card utilization ratio.

How a personal loan can improve utilization: If you use a personal loan to pay off $5,000 in credit card debt: your credit card balances decrease by $5,000. Your utilization ratio falls (same limits, lower balances). Your credit score rises (lower utilization is the second-largest FICO factor at 30% of the score). The personal loan balance replaces the credit card balance but does not appear in the utilization calculation - a net positive for your score.

The tradeoff: While the personal loan improves utilization, it adds a new installment account (new account reduces average account age slightly) and triggers a hard inquiry at application. Net effect: most borrowers who use a personal loan to consolidate credit card debt see a credit score improvement within 1-3 months, driven by the utilization reduction outweighing the inquiry and new account effects.

Warning: After paying off credit cards with a personal loan, keeping the credit cards open (and not accumulating new balances) maintains the low utilization. If you run the credit cards back up while also carrying the personal loan, your total debt increases and your score will fall.