How Does Debt Consolidation Affect Credit Scores?

Getting on top of your finances can – sometimes – feel like an impossible feat, but there are some straightforward ways to do this. A debt consolidation loan could be an option that works for you. After all, it allows you to pay off your creditors and seize back control over your own financial wellbeing. It is really important however, and this is all part of you getting back on track, that you understand everything about a loan like this and how it might impact your credit score.

Can debt consolidation affect your credit score?

What’s your current credit score? You might already be finding it hard to make your monthly payments to multiple lenders and you’re possibly not ready to think about your credit rating. But your financial struggle might already be reflected in your credit score. Constantly being in debt or missing repayments will impact your credit rating for the worse.

You may feel that planning for your financial future is out of reach when you’re living with your tricky financial present, but it is worth considering. There’s every chance that you will need to apply for future loans, credit or a mortgage, but you could be refused if you have a poor credit rating.

This is when a debt consolidation loan could really work for you – and for your credit score.

Would debt consolidation affect my credit scores?

When you first take the loan out, your credit score might take an initial dip, but you are opening a new line of credit. What you will do next, however, can send your credit rating in the right direction.

1. Pay off your debt and close those accounts

Use the loan money for what it was intended – pay off your debts with multiple lenders and close those accounts. You will reduce the number of accounts in your name and only have one creditor to focus your energies on. With one lender, one monthly repayment and one interest rate, it will be easier to keep on top of things.

2. Your credit utilisation (CU) ratio will improve

Your credit utilisation ratio shows your available credit. One credit card with a £10,000 credit limit, and a debt of £7,000 would give you a ratio of 70%. By closing your accounts and repaying your loan, your CU ratio will decrease. The recommended level is below 30%.

3. Your payment history gets better

Simply making regular in-full repayments on time to your one creditor looks great on your record.