Does Debt Consolidation Hurt Your Credit or Actually Improve it?
14th March 2023
If you're considering consolidating your debt, you may be wondering: does debt consolidation hurt your credit?
Consolidating your debt can improve your credit if you manage your debt consolidation loan correctly by making your monthly loan repayments on time. In this article, we dive into everything you need to know about consolidating debt and how you can improve your credit score in the long term, answering questions including:
- What is debt consolidation?
- What types of debt can I consolidate?
- How does consolidating your debt work?
- When should I consider consolidating my debt?
- Why consolidate your debt?
- Does debt consolidation affect credit scores?
- Does debt consolidation hurt your credit?
- How do I consolidate debt without hurting my credit scores?
- How will debt consolidation improve credit scores?
What is Debt Consolidation?
Debt consolidation is the act of combining all of your different debts into one monthly loan repayment by taking out a debt consolidation loan and using the new loan to pay off all your different debts.
It's worth noting that this type of loan can be an unsecured or secured loan. With unsecured loans, you don't need any collateral (like your home) to be eligible for the loan, as opposed to a secured loan which would require collateral.
What Types of Debt Can I Consolidate?
When you consolidate your debt, you can combine any type of debt into your loan. This can include credit card debt and other debts loans. You can turn multiple debts into one single debt with one payment needed each month.
With debt consolidation loans, you do not need to pay off all of your debts. You can choose exactly which debts to include in the debt consolidation loan, offering you flexibility in managing your repayments. When deciding which debts to include in a consolidation loan you should consider the APR (on both the existing loan and the new loan), the term of the loan and the total amount you will need to repay.
How Does Consolidating Your Debt Work?
In order to consolidate your debts, you will need to take out a debt consolidation loan with a lender of your choice. With this new loan, you will borrow a certain amount with a set interest rate and annual percentage rate (APR). This amount will then be divided into monthly repayments over a set time period, such as 24 months, and you will make one payment each month to pay off the new loan.
When Should I Consider Consolidating My Debt?
You might want to consider consolidating your existing debts:
- If you have several debts and need to make multiple payments on a monthly basis.
- You are paying a high-interest rate on all your separate debt repayments.
- You are looking for a simplified way to repay your debt.
Why Consolidate Your Debt?
Below we have listed some reasons why you might want to consider consolidating your debts:
1) Reduce your monthly outgoing
When you borrow money from multiple creditors, each loan will have its own interest rate. If you are able to obtain one larger loan at a lower interest rate this may enable you to reduce your monthly outgoings. You will also need to look at the term of the new loan as this will impact the total amount you repay.
2) Reduce Stress
Debt is always stressful, but this stress can become overwhelming when you have repayments owed to multiple lenders all with different repayment schedules. This can quickly lead to consistent worry about missed payments that can result in a negatively impacted credit score. With debt consolidation, you can consolidate multiple debt repayments into one monthly payment.
Does Debt Consolidation Affect Credit Scores?
Credit scores are created by credit bureaus (Equifax, Experian and TransUnion), who gather information on your credit history and turn that information into a credit report with a score. Lenders will then perform a credit check and use this information in your credit report to determine whether they will offer you a loan or not. If you have a good credit score, you are more likely to get offered a loan.
Any credit actions you take, such as taking out a personal loan, will affect your credit score. Taking a debt consolidation loan will therefore affect your credit rating. Whether it will positively or negatively affect your credit score in the long term is dependent on your actions.
Does Debt Consolidation Hurt Your Credit?
- Hard search: Before you can receive a loan, your selected lender will perform a hard search. A hard search is when your credit history is checked by lenders for them to assess your creditworthiness. Whenever a hard search is performed, your credit score will drop. Try not to apply for credit too frequently or this could have a larger impact.
- New Credit Account: Once you have been approved for a loan, a new credit account will be opened, which will bring down your credit score. New credit accounts are often viewed as a risk by lenders, which is why your credit score will drop. In addition, a new credit account will bring down your overall account age, which may also bring down your credit score.
Whether consolidating your debt hurts your credit score in the long term will depend on how you manage your debt consolidation loan.
How Do I Consolidate Debt Without Hurting My Credit Score?
Hurting your credit is a major worry for most people when considering taking out a new loan. While often your credit is only negatively affected in the short term, long-term impacts can occur if you do not meet your monthly payments for your loan.
To avoid a long-term impact on your credit, you need to ensure that you are meeting your monthly payments. If you ensure that your payments for your loan are paid in a timely manner, then not only will you avoid hurting your credit, but over the long term, your credit score can improve.
How Does Debt Consolidation Improve Credit Scores?
Payment history is the most important factor that impacts your credit. Late payments will bring down your credit score while consistently making payments on time will improve your credit score. If having one loan makes it easier for you to make your monthly payments on time, you can improve your credit rating in the long run.
The Bottom Line
In the short term, a new loan will bring down your credit score. In the long term, consolidating your debt can improve your credit score, as long as you ensure that each of your monthly repayments are made on time. Consolidating your debt can offer a simple way to repay your debt.
To consolidate your debt, Finio Loans offers debt consolidation loans as well as expert and professional consultants to discuss any further questions you may have.