Debt consolidation is helpful in providing you with a way to manage your financial well-being. It is a strategy that combines high-interest debts into one lower interest monthly payment. But what influence does it have on your credit score?
How Debt Consolidation Can Help Your Credit Score?
With multiple debts owed to multiple creditors, it’s not hard to miss a payment here or there. When you use a debt consolidation loan to pay off your existing debt, you will have one monthly bill with a fixed repayment term. This bill will be due at the same time each month and will allow you to budget your finances accordingly. This could be helpful for your credit score in the long run as it can mean no more late payments.
Furthermore, you will also diversify your credit file when opening a personal loan, an operation which accounts for 10% of your FICO credit score. An installment account will be added to the credit report when you open this loan. Basically, having a mix of both revolving credits can have benefits for your credit score.
How Debt Consolidation Can Harm Your Credit Score?
Any time you take a new loan, even if its a loan to consolidate debt, you will require a ‘hard’ credit check. This inquiry will cause your credit score to take a small dip, although the effect shouldn’t be too major. Despite your credit score dipping a bit, if you reduce your utilization with debt consolidation, it should be helpful for your credit score in the long term.
Furthermore, if you try and solve all your financial woes with a debt consolidation loan, but don’t alter your financial habits, it could go very wrong. You could find yourself in a situation where you have even more debt, which will decrease your credit score even more.
Finally, if your debt is simply too much to pay and you opt for debt relief, your debts will be paid off in one lump sum, but your credit score will take a nosedive. This could last up to 7 years, where it will be difficult for you to obtain a credit card or get a mortgage to purchase a home.
As you can see, debt consolidation could have both good and bad influence on your credit score. However, it’s important to make some research before diving in and make sure you work only with professional and trustworthy lenders.