If you have high debt, consolidation will be a way out in that you will be given a single monthly payment and a lower interest rate. Debt consolidation may influence your credit score in a positive or harmful way. This depends on the strategies adopted during consolidation.
Here are some facts about a debt consolidation loan and their effects on your credit score before you go ahead.
How Can it Affect Credit Scores?
Despite the certain advantages of a single payment and the appeal of lower interest rates, it can negatively impact your credit score in the following ways. However, several measures seemed to reduce its effect.
[1] Lower age of credit
When you open a new account, the average age of your credit accounts can be reduced. The credit history length factor contributes 10 to 15 percent of the overall credit score. This is another good reason why you should not close the credit card accounts that are not active after consolidation.
[2] New credit inquiries
A tough inquiry will ultimately show up on your credit report whenever you apply for a loan or obtain a credit card. However, inquiries and new accounts affect credit scores, which contribute approximately 10%. A short period of numerous questions may result in low credit grades.
This can be avoided by checking your credit score before making any financial decision. This may also assist you in contacting the lender or the card company to inquire whether you have a acceptable credit score to qualify for the particular loan. Then, apply for only one loan or card that will help in the debt consolidation process.
[3] Not Making Payments on Time
If an individual fails to pay the outstanding balances on the old accounts during the consolidation process or misses a payment on the new loan or credit card, then this can negatively affect their credit score. According to me, You should pay all existing credit on time. This will help you develop an excellent credit score over time.
[4] Risen credit utilization
Your available credit could go down if you transfer debts owing on any credit lines into one loan or use a new credit card to consolidate them. Therefore, such actions can lead to higher utilization rates of your existing total debt limit.
When you have completely paid off the outstanding balance of your credit cards, do not cancel them but chop them up. This will keep you from being attracted to using them, though they will remain under your name and contribute towards the total available credit.
Reducing the effects of debt consolidation on credit
In my opinion, a debt consolidation loan cannot be met without a negative impact on credit score. However, some measures can be observed so that the impact is minimal.
[1] Keep old credit cards active
Moving balances from one or more cards to another may increase the utilization rate on the new card, but it is important to maintain low rates on all of them. It is suggested that you keep your old cards active, at least until the balance on them gets paid off.
[2] Pay off a balance transfer fast
You may be given up to a year to clear the amount you owe without incurring any interest charges. Clear off that amount as quickly as possible since that would be ideal. This will make it possible for you to lower your credit utilization ratio. It is very good and helpful for your credit score.
Final thoughts
It is worth noting that consolidating debt might affect your score, and monitoring your progress in rebuilding your credit score is good. Credit monitoring also makes it easier to avoid actions that may hurt the credit rating in the future.
