Credit Score with Debt Consolidation
Debt consolidation is when an individual with a number of loans across multiple accounts, store cards and credit cards takes out one overriding loan to pay off all of the smaller individual debts.
A debt consolidation plan allows you to keep all of your monthly payments under one roof and merge them into one manageable chunk, a solution that is far more controllable than keeping track of paying several creditors on different dates.
Aside from the logistics and simplicity of one payment, debt consolidation loans in the UK often mean the one payment that you are required to make is lower than the previous combined total of multiple payments. However, before you sign for any services you should utilise a debt consolidation calculator to assess exactly what your monthly repayment will be.
You might also be able to take advantage of a low-interest debt consolidation loan or at least lower rates of interest than what you are currently paying on some of your smaller individual payments.
There are two types of debt consolidation;
Secured Debt Consolidation Loan
A secured debt consolidation loan is when the sum of money you have borrowed is secured against an asset, most commonly secured against a home and thus sometimes called homeowner loans.
Unsecured Debt Consolidation Loan
Unsecured debt consolidation loans are when the sum of money you have borrowed is NOT secured against your home or any of your other assets.
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.
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.