Debt consolidation that combines multiple debt balances into one new loan is likely to increase your long-term credit score if you use it to pay off debts. But you might see a decline in your credit rating at first. That may be fine, as long as you make payments on time and don't accumulate more debt. It is very likely that your credit score is already low because you haven't paid off the debt for months.
The good news? Once your debts are settled, much of your credit rebuilding will be in your hands. Using credit responsibly, especially paying your bills on time, will help you rebuild your credit history. Even so, you must enter knowing that it will take some time. Usually, any application for credit triggers a thorough inquiry about your credit, which can lower your credit score by a few points over a few months.
But the overall credit effect of debt consolidation should be positive, if you make sure you pay on time and change the habits that led to the accumulation of debts. When you consolidate your debt, your credit score will drop a little temporarily. This is because consolidation will trigger a query of your report. In fact, consolidating your debt has the potential to increase your credit rating over the long term if you make consistent payments.
Payment history represents 35 percent of your credit score. Making sporadic payments, or even worse, not making payments, is a quick way to destroy your credit score. However, making consistent payments on a debt consolidation loan can start to cause your score to rise again and show that you are making an effort to address your debt. While this is better for your report than a cancellation, it can even have a slightly positive impact if you erase serious delinquency, it does not have the same meaning as a rating that indicates that the debt was paid as agreed.
If you open a new credit account as part of your debt consolidation plan, be it a new balance transfer credit card or a new personal loan, the average age of the accounts will decrease and you may see a drop in your credit rating. If you already have a strong history of on-time payments, debt consolidation may not affect this aspect of your credit rating. The debt settlement process will particularly hurt your credit score if you have stopped paying your creditors to save money to settle your debts. If you think repaying your debt will take more than three years, you may be subject to a higher rate, according to Creible.
Closing a credit account could reduce the average age of accounts or increase your credit utilization ratio. With a balance transfer card, you are basically transferring your high-interest credit card debt to a card that will offer you a lower interest rate. The idea behind debt consolidation is that if you put all your debts in one place, it will be easier to pay them off. And if the accounts you settled were the ones you've had for a long time, it could affect your score because the length of your credit history (including the age of your oldest account) represents 15% of your credit score.
While debt consolidation may affect your credit score temporarily, you can also use it to build credit over time. Its main objective was to obtain debt relief without filing for bankruptcy, not to maintain perfect credit. Another factor in determining your credit score is the average age of your accounts or the length of time you have had those accounts open. Consolidating your debt can lower your monthly payments, but it can also cause a temporary drop in your credit rating.
If you are settling small accounts, especially if you are up to date with other larger loans, the impact of a debt settlement can be negligible. So let's take a look at life after debt settlement and what steps you can take to restore and rebuild your credit. .