Are you considering consolidating your debts?
For starters, debt consolidation involves converting two or more loans into one. The lender lends you money to pay off the loans being consolidated, upon which you’ll start repaying the new loan. Debt consolidation is an ideal way to manage your debt, since you’ll certainly get better terms on the new loan.
However, there’s a relationship between debt consolidation and credit score. If your score matters to you, and it should, then you ought to read on.
In this article, we’re answering the question: does debt consolidation affect your credit score?
You may also check: How To Get Instant Loans Despite Having Low Credit Score
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Does Debt Consolidation Affect Your Credit Score?
In a nutshell, yes.
However, debt consolidation affects your credit both ways and how low your score falls or how high it climbs will depend on a number of factors, as fleshed out below.
How Debt Consolidation Negatively Affects Your Credit
Consolidating your loans means taking out a new loan. And when you’re taking out a loan from a bank, credit union, or any other traditional lender, a hard credit check will be performed on your credit. These hard checks affect your credit negatively – you will drop at least a couple of points per check.
From this information, it appears your credit score is bound to drop slightly as soon as you apply for a debt consolidation loan, right? This is correct, but it can fall significantly if you make multiple applications for debt consolidations, probably because lenders keep denying your applications.
To avoid this from happening, it helps to ensure you’re applying to only one lender. Two at most. This way, there won’t be several hard checks on your credit.
Do extensive research on lender requirements so that you’re applying to a lender who is most likely to approve your application.
If you’ve got bad credit, you shouldn’t bother applying to traditional lenders. Local banks, for instance, rarely give loans to people with bad credit. Instead, look for companies that offer debt consolidation for bad credit.
Even if these companies will check your credit score, it’ll be a soft check, which doesn’t affect your credit.
How Debt Consolidation Improves Your Credit
To understand how debt consolidation improves your credit, you need to first understand how debt can ruin it.
If you’ve got multiple loans, paying them off fully and on time boosts your credit. It builds your credit history.
However, if you start paying late or infrequently, or if you default on them, your credit score will suffer significantly.
If you’re struggling to keep up with your loans, debt consolidation can help. Because you can get a lower interest rate and/or a longer-term, your monthly repayment will reduce and you will be able to pay it on time. As a result, you will start building a positive credit history, which is good for your score.
That’s the Truth About Debt Consolidation and Credit Score
Does debt consolidation affect your credit score?
Yes!
If you do it the right way, there will be a slight initial drop in your credit, after which it will start climbing. Looking at the bigger picture, we can say debt consolidation can boost your credit, as long as you don’t default on the new loan or make late payments.
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