Do Debt Consolidation Loans Affect Your Credit Score?
When you apply for any type of credit product, it will have an effect on your credit score.
However, applying for credit doesn’t automatically mean that your credit score will be damaged. So long as you’re approved, it can have a positive effect. For instance, debt consolidation loans can concurrently help or harm your credit. Here’s how:
Benefits of a debt consolidation loan
The clear benefit of debt consolidation loans is that it combines several debts into one helpful payment. This streamlines your outgoings so it’s easier to keep track of your finances. As a result, this will improve your payment history. Although this will take time to show up on your credit score, regular, on-time payments are the best thing you can do to improve your credit score.
Combining your debt into a single payment will also lower your credit utilisation ratio. This figure quantifies how much of your available credit your using. This number may fall if you take out a debt consolidation loan, as it will often increase your available credit.
Ways debt consolidation loans can harm your credit score
However, it’s important to be aware that applying for new credit comes with risks. Applying for new credit and being rejected is a sure-fire way to damage your score, so you need to be confident you’re in a strong position before you apply. Your debt consolidation loan will also reduce the age of your credit, which can be detrimental. Older credit accounts that show a positive history of timely payments are positive for your score, so opening new accounts and closing old ones can mean your credit will take a temporary hit.
Weighing up the pros and cons
Combining your debt into a new, low-interest loan – whether it be credit card consolidation loans, a balance transfer credit card, or an equity loan – have substantial benefits when it comes to organising your monthly outgoings. As long as you make regular, punctual payments, it’s entirely likely that taking out a debt consolidation loan will have a positive effect on your credit score. However, a hard pull on your credit file will always come with risk, so make sure you have everything in order before you apply to mitigate the risk of a rejection.