Kate Smalley • Sep 22, 2020
Debt consolidation can help you lower your monthly payments and get out of debt sooner, but you should be aware of how it impacts your credit score. Applying for debt consolidation loans can cause a temporary dip in your credit score, but making on-time payments towards a debt consolidation loan can help you increase your credit score in the long-term. In summary, debt consolidation can help you build your long-term credit score when used properly.
In the short term, debt consolidation can cause a dip in your credit score. When you apply for a debt consolidation loan or similar financial product, a hard inquiry is made on your credit file. This decreases your credit score temporarily. Applying for multiple new loans in a short period of time will cause multiple dips to your credit score. To avoid multiple impacts to your score, you should do your research, compare loan offers, and feel confident about your likelihood of approval before applying for a loan. A new credit account also lowers the average age of your credit, which can temporarily decrease your score.
In the long term, if you continue to rack up credit card debt or put charges on credit cards after you pay off your balance, any gains from reducing your credit utilization will disappear and your score will suffer. Missed or late payments will also negatively impact your score, since payment history is one of the most important factors that determine your credit score. It’s important to address any poor habits that contributed to your credit card debt in the first place. Establishing healthy credit habits will not only help you stay out of debt, but improve your credit score over time.
While debt consolidation will not help your credit score in the short term, over the long term it can help improve your score if used responsibly to pay off and stay out of debt. Improving your payment history is one of the key factors to improving your credit score. That said, it will take time for loan payments to show up on your credit report and see the benefits reflected in your score.
As you pay off your debt and lower your balance, your credit utilization ratio will decrease and your credit score will improve. Continuing to make your loan payments on time will also improve your credit score over the long term. There are debt consolidation loan options available with bad credit, but having a good credit score will set you up for long-term success.
There are different methods you can use to consolidate your debt. You could use one of the following four methods for debt consolidation:
The pros and cons of these four main debt consolidation methods are outlined here:
If you feel confident that you can make monthly payments on time, a personal loan may be the right debt consolidation option for you. Lenders will qualify you based on your credit score, so it’s important that you know your score when researching new loan options. Sign up for Borrowell to get your free credit score, quickly compare loan offers, and see your likelihood of approval for new loans available to you.
If used responsibly, debt consolidation can help you pay off your debt sooner and improve your credit score over time. Certain debt consolidation methods can even help you pay off debt on a low income. A higher credit score can help you qualify for loans, credit cards, and other financial products with lower interest rates in the future.
A debt consolidation loan can help you build an established history of on-time payments and reduce your credit utilization. Applying for a debt consolidation loan or other financial products, however, will cause a dip in your credit score in the short term. Do your research to decide which debt consolidation method is best for you, make a plan to pay off and stay out of debt, and continue to monitor your credit score and credit report to track progress over time.
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