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.
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.