Will Debt Consolidation Hurt Or Improve The Credit Ratings?

One of the oldest trick people have used to pay many small loans is take a bigger loan. However, there are those that still question this move. Is this the right thing to do and will it help improve the credit score?

Debt consolidation is one of the best ways to get out of many small debts and put your focus on a single debt.

Debt consolidation loans

These are loans taken out to clear old loans which might affect your credit rating.  They usually have better interest rates and terms. Overall, a debt consolidation impacts your credit score in a positive way.  The credit agencies seeing you paying several accounts at once make it appear that you’ve cleared off the accounts.

The consolidation loans will then appear as a new loan while the rest of the accounts will look positive. The only thing you must ensure is that all the repayments for the new consolidation loans are paid on time.  This is also another step in improving your credit score through the consistent payment.

Debt consolidations loans can easily be gotten from alternative lenders and not the ones that you owe money already. There are several excellent online companies that offer debt consolidation loans with better terms and lower interest rates even with a bad and average credit score.  Your best option is to go to online companies like Avant personal loans which offer consolidation loans to individuals with lower and average credit scores.

Once you’ve got the loan, you can then easily clear all the other debts and put your focus on a single loan with a much lower interest rate, better terms, and flexible repayments. One of the biggest benefits of consolidating your loans is having to deal with one monthly payment and one single due date. This is a great relief compared to making small monthly payment to different creditors at the end of the month. Your interest rates will also be lower which brings your total debt payment less.

How debt consolidation affects your credit score

After getting the consolidation loan and paying off your loans and credit cards, your credit score should improve after a few months. However, there are a few precautions you need to take to prevent the score from coming down again. You need to leave your accounts open and ensure the balance does not run high again.

Most people experience a 20-point increase credit score three months after consolidating all their credit cards. The score gets even higher when you have multiple accounts that you manage. This gives creditors an image of a better financial risk.

When can a credit score drop after consolidating?

There are a few instances when your score can drop after consolidating your other loans.  This usually happens when you transfer several credit card balances into a single credit card and max out the new credit limit. Remember that a high utilization ratio on your credit card is a red flag to the creditors.

Make sure you avoid such simple mistakes when consolidating to avoid making your credit score much worse. Leave the paid off credit lines open to benefit from a low utilization ratio. You also need to make sure the balance in your new freshly paid credit cards does not run high. Lastly, you need to make sure there are no delays in payments in your consolidated loan.

It is worth noting that your payment history is the biggest factor in determining whether your credit score will be higher or lower.

When is it right to consolidate?

Consolidating your loans is not always the best option and should be taken when you know how it will impact your score and help you clear your debts. You must have a goal in mind that the consolidation must achieve. There is no need to take a consolidation loan without any goals in mind. Some of the things you might want to achieve include reducing interest rates, lower monthly payment, adjusted due date, better focus on a single loan and much more.

Bottom Line

If you manage and handle your credit consolidation loan properly, the long-term effect on your credit score should more to the positive. However, make sure you do everything right and solve any issues along the way. You have to remember that credit consolidation aims at paying off your loans and giving you better control over your debts. If you still cannot manage to pay the consolidated loan on time, then there is no need to take one.