Consolidation may even boost your credit rating, says new Transunion report. According to the analysis, almost 70% of consumers who consolidated their debts saw their credit scores improve by more than 20 points. Those with a VantageScore lower than 720 saw the greatest improvement. VantageScores scores range from 300 to 850.
However, making the decision to consolidate your debt into a single manageable payment will improve your long-term credit rating. Payment history accounts for 35 percent of your credit score, so making payments on time will increase your score. If you only have revolving credit, such as credit cards, adding a personal loan for debt consolidation can improve your credit mix and also increase your score. Consolidating your debt can lower your monthly payments, but it can also cause a temporary drop in your credit rating.
Two common approaches to debt consolidation are obtaining a debt consolidation loan or a balance transfer card. If done right, debt consolidation will have a positive effect on your credit. It reduces your debt and lays the foundation for consistent on-time payments, which can cause your credit score to skyrocket. Debt consolidation can adversely affect your credit score in the short term, as the lender can do a thorough investigation of your credit history.
However, in the long term, debt consolidation can positively affect your credit, especially when you make payments on time. While there is a clear advantage in the ease of a one-time payment and the temptation of a lower interest rate, consolidation can affect your credit rating in several ways. 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. On the other hand, consolidating your debt with a loan could lead to a drop in overall credit utilization, causing your rating to rise.
If you're going through the debt consolidation process, it might feel good to close your old accounts after a balance transfer or get a new loan. It is difficult to know exactly how much debt consolidation will affect your credit score, as it depends on several factors, such as the extent of your credit history, your open accounts, and the actions you take after consolidation. To estimate how debt consolidation may affect your particular credit rating, check out the free credit rating simulator on WalletHub. Homeowners can use home equity to obtain a one-time loan or line of credit (HELOC) to consolidate debt.
If your goal is to eliminate debt, but you prefer not to apply for a debt consolidation loan, there are some alternatives you can consider. While debt consolidation may affect your credit score temporarily, you can also use it to build credit over time. Consolidating your debt can be a daunting task, but with the right strategy, it can be a little less daunting. Balance transfers, in which credit card debt is transferred to a card with lower interest or no interest, work if you have a good to excellent credit score, i.e.
700 or higher. Debt consolidation can adversely affect your short-term credit score if you get a loan or credit card and the lender does a thorough investigation of your credit history. If you have excellent credit, you may consider more than one approach to consolidating your debt, including balance transfer credit cards, personal loans and home equity products. Consolidating your debt can help you simplify your monthly finances by reducing the number of bills you have to manage.