Will consolidating debt lower your credit score?

Debt Consolidation Loans Can Hurt Your Credit, But They're Only Temporary. By consolidating a debt, your credit is checked, which can lower your credit rating. Consolidating multiple accounts into a single loan can also lower your credit utilization ratio, which can also affect your rating. Consolidating your debt may affect your credit rating, but as long as you manage your debt responsibly, any negative effects will be temporary.

Understanding your options and how they affect your credit score can help you determine the right steps. 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. Most debt consolidation methods will temporarily lower your credit score for a variety of reasons.

For example, debt management plans ask you to stop using your credit cards. If you cancel a card, that reduces the amount of credit you have available and may lower your credit score. Debt consolidation doesn't hurt your credit score much in the short term and will actually help improve it over time. Debt consolidation is one of the main options available to indebted consumers looking to ease their path to zero balances, as well as save money and protect their credit position in the process.

Unlike other alternatives, such as debt management, debt settlement and even bankruptcy, debt consolidation, when done correctly, will not hurt your credit significantly. Every time you formally apply for a credit, the creditor does a thorough investigation, also known as “withdrawing your credit”, to verify your creditworthiness. Usually, each hard consultation reduces your credit score by a few points. If you are looking for and applying for debt consolidation loans from several banks at once, your credit could be temporarily affected.

Fortunately, numerous difficult inquiries within a set period, between 14 and 45 days, are usually combined into one when calculating your credit score. The most important factor affecting your credit rating is your payment history; even a late payment can affect your credit rating. If the simplified monthly payments that come with debt consolidation will help you pay on time, always, debt consolidation can improve your credit score by helping you avoid late payments. The views expressed here are those of the author alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or endorsed by any of these entities.

While debt consolidation may affect your credit score temporarily, you can also use it to build credit over time. Not only does debt consolidation simplify bill payment, but more importantly, it often results in an increase in the credit score of some people, says Liz Pagel, senior vice president and business leader for consumer lending at TransUnion. Even if you don't have to close your credit card accounts, avoid adding new debt to your cards as you work to pay your balance. If you have credit card debt that charges 20% or more interest, consolidating into a new credit card or loan with a lower interest rate will save you money.

What you do after you have consolidated your debts into a single loan or line of credit may have a greater impact on your credit situation than the act of consolidation itself. Keep in mind that it's usually not a good idea to replace unsecured debt (such as credit card debt) with secured debt (such as a mortgage or car loan) because you could lose your home or vehicle if you can't pay. If you're trying to decide if debt consolidation is a good idea, start by looking at your overall financial life. A debt consolidation loan will pay all outstanding credit card balances at once and put it into a system where you will make a fixed monthly payment of the loan.

When you apply for a consolidation loan, lenders do a “thorough investigation” on your credit, which lowers your score by a few points. It reduces your debt and lays the foundation for consistent on-time payments, which can cause your credit score to skyrocket. After completing the debt consolidation process, consider leaving your old credit accounts open but without balances. Credello is not a licensed credit repair organization, credit counselor, debt management company, debt settlement company or any other organization in the business of offering advice on how to improve or repair your credit.

Consolidating your debt can help you simplify your monthly finances by reducing the number of bills you have to manage. . .

Jayne Kilbury
Jayne Kilbury

Professional music lover. Avid writer. Lifelong coffee ninja. Award-winning twitter guru. Total internet aficionado.

Leave Reply

Required fields are marked *