Debt consolidation has the potential to affect your credit score either optimistically or destructively_ It depends upon which method you adopt, and regularly you pay your installments. Debt consolidation is usually considered in specific circumstances when people want to update their repayments amounts of multiple high-interest debts. They choose this option with the belief of saving money and reducing their debt burden. People, who hold a large amount of debt and want to lower his number of creditors that they have to pay every month, choose the debt consolidation option.
Although reducing your debt may aid you with your credit score with time, but debt consolidation is usually not used explicitly as an approach to increase your credit score. It is basically used to reduce your significant debt.
Luckily, when you consolidate your debt, it not only diminishes your mortgage amount but automatically increases your credit score, but it only happens if you go with the flow and stick to one reliable strategy to pay off your mortgage.
If you have a high-interest credit card amount on several accounts, it can become pretty hard to make your monthly payments, due to which you may not afford the stuff you want to buy, and you would be less likely to make savings. It may also bother you to initiate and understand how debt consolidation can impact your credit score.
Debt Consolidation Impacts Credit Score
When you consolidate your debt, you have to keep multiple things in your mind simultaneously that the debt consolidation can either improve your credit score or harm it. Below are some impacts of debt consolidation on your credit score.
Improves Credit Score |
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| Enhanced Payment History | If you pay your installments on your new loan on time, you would see your payment history being developed gradually, but it may take some time. Your payment history is one of the most crucial aspects of your credit score and loan-related concerns. Therefore, after consolidating your debt, you need to be consistent in paying your installments. |
| Reduces Credit Usage Ratio | The credit usage ratio is the measure of how you are using your available credit. With debt consolidation, your credit usage ratio can also reduce because it will increase your available credit score. A high credit usage ratio impacts poorly on loan-related matters. |
Suffers Credit Score |
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| New Credit Account | When you open a new credit card or personal loan, it may temporarily lower your credit score. Many creditors consider a new credit card as at risk, so it harms your credit score. |
| New Credit Requests | This is the most basic credit score damage that can occur before applying for debt consolidation. When you apply for a personal loan or amount transfer credit card, the lender will execute a complex investigation on your credit which may result in reducing your credit score. |
| Diminishes Credit Age | With time, your credit card gets older, it shows a positive history of your payments and enhances your credit score. However, when you request to open a new credit card or personal loan account, it temporarily reduces the average age of your credit score. |
Debt Consolidation Methods
Debt consolidation actually combines all your multiple credit or loan balances and makes one loan. Nevertheless, not all debt consolidation works this way. Below are the four methods to consolidate your debt efficiently.
Personal LoansYou can pay off your high-interest credit card balance through personal loans only in case you can get a personal loan at lower interest rates. It would permit you to pay off your debt quickly. |
Home Equity Loans or HELOCsAnother option is the home equity loan or HELOC, in which the homeowners can easily share a portion of their home as security and take out another loan on it. These loans generally provide a lower interest rate as compared to a personal loan. But, the downfall you may encounter, if you are unable to pay installments every month, you can lose your home. |
Retirement Account DebtsYou can also take further debts on the basis of your retirement account for debt consolidation and pay off your mortgage. Notwithstanding, you must pay it back according to your retirement plan’s rules or else you may face penalties and taxes. |
Balance Transfer Credit CardsSome introductory balance transfer credit cards offer lower or no interest rates on an initial loan that you can transfer to the card within a fixed time. It would provide you an opportunity to save on your interest and develop your debt by paying it off gradually. |
Why do you need Debt Consolidation?
Debt consolidation provides numerous benefits with your credit score and interest rate, which can save you money. If you have to go for a new credit card loan that has an interest rate of 20%, you can consolidate your mortgage to reduce this interest rate, and you would save the rest of the money.
It also simplifies your monthly installments. With debt consolidation, all your credit card accounts would be transformed into one, and you could easily manage your payments. Late or missing payments can destroy your credit scores, so consolidating your debt can help you distended your payment disaster.
Final Thoughts
Debt consolidation is considered the most powerful method to help in reducing the interest rate and increasing your credit score. You can adopt a new personal debt, balance transfer credit card, or home equity loan or HELOC to lower your debt’s interest rate. You need to consistently walk on the right path and follow the most suitable strategy of paying off. If you pay your installments after due time, it may impact poorly on your credit score, and you would barely get rid of the mortgage quickly.