How much does debt consolidation affect my credit score?
Your credit score may take an initial impact when you take on the loan as you are taking on new debt. However, over time and by making your monthly regular payments on time, you will find that your score evens out and should even improve.
All lending will have some effect on your credit score as any potential lender has to run what’s called a ‘hard search’ on your credit record. This will show up on your report as will the fact that you are increasing your outstanding credit. The impact is a short-term effect and, if you keep making your loan repayments on time and in full, you could positively impact your credit score.
What is a debt consolidation loan?
A debt consolidation loan brings together all of your existing loans into one loan. The debt consolidation loan will have a lower interest rate and lower monthly payment. As well as reducing the size of the monthly payment, a debt consolidation loan will mean that you have only one lender.
What is a Credit Score?
Your credit score rating is a numerical representation of the risk level you pose to lenders in the instances you need to borrow money. Your credit score is representative of your risk to lenders at the current moment and can fluctuate from month-to-month based on a range of factors and considerations. The formula calculates your credit rating from your payment history, the number of open accounts and the amount of money owed, and your rating can have an impact on loan applications and the interests rates you pay if you are accepted for a loan.
What is a Good Credit Score and How to Run a Credit Score Check?
All credit score ranges operate on a scale of 300 to 850 and in both cases, the higher the score means the lower risk you are to the lender.
800 To 850 = Exceptional Credit Score
If you sit within a credit score range of 800 to 850, you are considered amongst the least risk to lenders. Scores from 720 to 850 are low-risk and consistently responsible with regards to loans and regular, on-time repayments, but those in the 800 – 850 bracket are considered to have an excellent score and track record of no late payments and low balances on credit cards. If you have achieved this fantastic score, you shouldn’t have any trouble securing credit cards, mortgages or loans, and you will likely benefit from special low-interest rates.
740 To 799 = Very Good Credit Score
Having a credit score rating of 740 to 799 indicates to lenders that you are responsible when it comes to managing your finances and general credit management. If you are within this bracket, it means you are consistent and reliable for repayments on credit cards, loans, utilities and mortgages and they are paid on-time.
670 To 739 = Good Credit Score
A credit score rating of 670 to 739 is slightly higher than the national average, but one that might indicate a somewhat rocky history of repayments and credit management. Interest rates for customers with a credit score within this range might still be able to benefit from slightly competitive rates but may also find it challenging to qualify for the most competitive rates and credit types.
580 To 669 = Fair Credit Score
The credit score range of 580 to 669 is considered average. Generally speaking, there might be a few discrepancies in the history of credit management, but no major red flags will be raised. It will still be possible to apply for many credit types, but it is doubtful to be accepted for the most competitive rates of interest.
Under 580 = Poor Credit Score
Hopeful borrowers with a credit score rating between 370 and 579 might have a hard time securing credit of any form, especially credit with reasonable rates of interest. This ‘poor’ credit score rating could be the result of many different loans with multiple lenders, bankruptcy, frequent late repayments or simply someone at the start of the journey trying to build up credit – which leads us on to…
No Credit Score
If your credit score is low, 370 or under, for example, it might be that you haven’t had a history of lending money and therefore not had the chance to build up a decent credit score for yourself. After you are approved for your first credit card or loan, talk to your lender about a responsible repayment scheme that will help you to build a high credit score for future lending.
The three primary credit reference agencies in the UK; Equifax, Experian and TransUnion, all of which will have access to your full credit rating and credit history. The different credit agencies will rank and score your credit history in different ways, but each will operate the same thresholds.
Improve Your Credit Rating Shortlist
There are a few easy things you can do to improve your credit rating:
- Make sure your name is on the electoral register (visit www.aboutmyvote.co.uk)
- Pay off existing debts
- Close unused credit cards
How is Your Credit Score with Debt Consolidation?
Debt consolidation can have a positive impact on your current credit score rating. As previously mentioned, debt consolidation will take all of your monthly repayment schedules with different lenders and tie them all into one more manageable chunk.
When a borrower has to remember multiple payments to different lenders, they can sometimes forget a repayment; this results in late repayments that harm their credit rating. With that said, when a borrower has one consolidated payment each month, it drastically reduces the chance of a missed repayments and defaults. Therefore, with the borrower now making consistently on-time repayments each month, their credit score will begin to increase.
However, it is worth noting that applying for a consolidated loan will leave a trace on your credit score, known as a ‘credit search’. Bear this in mind when shopping for a consolidation loan, and only apply for those that you are confident you have a high chance of acceptance.
A debt consolidation loan’s impact on your credit score
As with all loans, there will be an initial effect on your credit score as you are increasing your borrowing. However, with loan repayments made in full and on time, you may even improve your credit score.
Is debt consolidation bad for my credit score?
All new debt will make a small impact on your credit score as you are increasing your level of debt. However, if you make your monthly repayments in full and on time, you are more likely to show an improvement in your credit score.
Does debt consolidation improve my credit score?
As with any type of debt, there will be an initial impact on your credit score as you are taking on new debt. However, a debt consolidation loan makes it much more straightforward to meet your single monthly payment and so improve your credit score over time.
There are several reasons why a further loan could make a positive difference to your credit score.
- By clearing your debts using a consolidation loan, you’re in no danger of further defaults. Your credit record will also show that your debts have been paid in full. Both these factors can help to positively influence your credit rating.
- If you’re meeting your monthly repayment instalments for your consolidation loan, it shows creditors that you are capable of sticking to a credit agreement. Over time, this also has a positive impact on your creditworthiness.
- In the medium term, improving your credit rating will enable you to access lower-cost borrowing, should you need it. This, obviously, is more affordable to pay back, reducing the chances that you will fall into arrears.
How to consolidate credit card debt with a low credit score
You may be able to get a debt consolidation loan, even if you have a low credit score. You may need to take out a secured loan, rather than a personal loan, as the loan will be secured against an asset, like a house or property. Repayments are particularly important on secured loans.
How to consolidate debt with bad credit score
Speaking with any financial advisor or a debt company itself, you may be able to take out a debt consolidation loan even if you have bad credit. You may need to take out a secured loan, which secures the loan against an asset, like a property.
Debt consolidation without affecting credit score
A debt consolidation loan is a good way to improve your credit score over time, even though you might have to experience a small impact when you take the loan out as you will be taking on new debt. However, regular monthly repayments can help raise credit scores over time.
Factors That Can Affect Your Credit Score
Figuring out how your credit score works can seem complicated at first, but there are a few simple steps you can take to boost your credit score and improve your chances of receiving a loan. Factors that impact your credit score include:
1. Payment History
The most important factor that will impact your credit score is your payment history. Even if you miss a payment for a loan once, your score will be impacted negatively, so it’s essential to make your payments in full and on time. Lenders want to ensure that you are going to repay your debt on time when they are considering whether to offer you credit. Payments including credit card bills, mortgage loans, car loans and student loans will all affect your score, so it’s essential that you keep on top of them.
2. Credit Age Or Credit History
Your credit age will affect approximately 15% of your overall credit score. A lender will look at two main factors when considering the age and history of your credit accounts, which are:
- The age of the account that has been active for the longest
- The average combined age of your accounts, which is calculated by adding up the total age of each of your accounts and dividing it by the number of accounts that you possess.
The longer that you have held your accounts for, the more it will impact your credit score positively, so it’s a good idea to keep your older accounts open unless you have a valid reason to close them.
3. Credit Enquiries
There are two types of credit enquiries that can affect your credit score: hard enquiries and soft enquiries. Hard enquiries appear on your credit report and can reduce your score for a while before your credit begins to improve again. Soft enquiries don’t appear on your credit report, so the fewer hard enquiries that show up on your credit report, the better. Hard enquiries make up approximately 10% of your total credit score.
Is a credit score needed for a debt consolidation loan?
A credit score is needed for a loan of any kind, but debt consolidation lenders understand that their customers may have a particular financial circumstance that they can help with.
How does a debt relief program affect my credit rating?
A debt relief programme may offer a Debt Relief Order (DRO) and give you short term support, but it will show up on your credit report and it will show lenders that you have struggled with repayments. Notice of your DRO will stay on your credit file for up to six years after the date the DRO was made. This may also make it harder to open a new bank account or even rent a property.