Do Debt Consolidation Loans Help Your Credit?

Are you trying to improve your financial situation but finding it tough to get a little breathing space? The month rolls around quickly and it’s time to make another repayment on your outstanding debt. If you have got multiple loans, then you will be living with constant payment deadlines. You are leaping from one month to the next, but there might be solutions that help you take control of your finances. However, they might not work for your credit score.

Your credit score is critical when you are shopping around for financial products and any negative impressions on your record can stay there for many years. It might feel like it’s more than you can think of right now, but there are ways that you can give your credit score a little boost, avoid any negative markers and make your monthly outgoings more manageable.

A debt consolidation loan is one way in which you can do all three things at once.

Does debt consolidation affect your credit score – and how much?

In the short term, if your consolidation loan application is approved, your credit rating might take a little dip. You are taking on a new line of credit and this will change your credit utilisation ratio. Your credit utilisation (CU) ratio is the figure that shows how much available credit you have.

You might have a credit limit of £10,000, and if you had £5,000 worth of loans, your credit utilisation ratio would be 50%. However, it is recommended to keep this figure around 30%.

Following the initial period, your credit rating should start to get better.

Why?

You are starting to decrease your CU ratio
You’re making regular payments on time
You’ve paid off your other debts and closed those accounts

If you miss repayments on the loan or make more than one application for a loan, you could negatively affect your score.

Why condense all your debts into one loan?

  • It will improve your financial budgeting each month
    You can group all your borrowing into one monthly repayment, which is easier to manage.  So choose the best consolidation loans of 2020 now!
  • Reduce your overall repayment costs
    A loan could actually help you to avoid paying more money each month if the interest rate is less than the combined total interest of all your debts.
  • A better personal credit score
    You are more likely to repay one loan payment on time every month, rather than many confusing payments across the month. This will then prove that you are a responsible borrower, which will eventually improve your credit score.

 

Is debt consolidation the best solution for my credit score?

A consolidation loan is one of the best ways to take control of your finances back, while having the least impact on your credit report, but how does it compare to some other options out there:

IVA

An IVA (Individual Voluntary Arrangement) is a type of insolvency writes off large chunks of what you owe. It is important to bear in mind that an IVA agreement will stay on your credit report for six years from the point of agreement.

During these six years, your impaired credit rating will make it difficult for you to take out other financial products.

Bankruptcy

Considered as a ‘blank slate’, bankruptcy does carry a considerable cost. As with an IVA, bankruptcy will stay on your credit report for six years from the time of declaration, but it could negatively impact your credit rating for years after that.

Debt Management Plan

An informal arrangement with creditors to repay what you can until the debt is repaid, a Debt Management Plan is very likely to have a negative impact on your credit rating as you are repaying less that the amount you agreed to.

Would a debt consolidation loan help your credit rating?

This is very much up to you. If you keep making regular monthly payments, on time and by paying the full amount, you could improve your score. If you don’t keep your repayments up, you could make your score worse.

Our experienced advisors will help to understand what the best option is. We never recommend debt consolidation to people who can’t afford the repayments. To find out if this solution is for you, talk to our advisors.

If you are facing serious money issues and want some impartial free advice the money advice service can help.

Contact us today

We’d love to help you move towards a debt free future. Our friendly team will offer no-obligation advice and answer any questions you might have about joint debt consolidation loans – just call us today.

Why condense all your debts into one loan?

  • It will improve your financial budgeting each month
    You can group all your borrowing into one monthly repayment, which is easier to manage.
  • Reduce your overall repayment costs
    A loan could actually help you to avoid paying more money each month if the interest rate is less than the combined total interest of all your debts.
  • A better personal credit score
    You are more likely to repay one loan payment on time every month, rather than many confusing payments across the month. This will then prove that you are a responsible borrower, which will eventually improve your credit score.