4 Primary Ways Debt Consolidation Affects Your Credit Score

Nobody wants to owe money to creditors; everyone wants to be free of debt.

Until all the money owed is paid off, the person in debt cannot save as much money or fully utilize their income. Those who are overwhelmed with debt sometimes opt for debt consolidation.

What is debt consolidation?

Debt consolidation is the process through which an individual takes out one large loan, and using that money, pays off some or all existing debt. Then, he makes a single monthly payment until the new debt is paid off.

Debt consolidation is useful for people who are tired of juggling multiple debts or making multiple monthly payments, and for those who can qualify for a new loan at lower interest rates compared to their existing debt.

Most individuals carry out the debt consolidation process via a balance transfer credit card, or by taking a personal loan at a low interest rate.

What impact does debt consolidation have on your credit score?

There are several ways in which debt consolidation can affect your credit score:

1.Hard inquiries can be detrimental to your score

Whenever an individual applies for a new loan or credit card, a hard inquiry is registered in his credit report.

A single hard inquiry can ding a credit score by as much as 5 points, which is why the consumer should only apply for loans or cards that they can qualify for.

On the other hand, this ding in the score is temporary – the effects don’t last for more than a year, so it may be worth it if you apply and receive the loan.

2.Your credit age may fall

The average length of your credit accounts is an important component of your credit score.

Whenever you open a new credit account, the average age of your accounts falls, and this may result in a ding to your score as well. But, as you make payments on time, there will be a generation of positive credit history on this account, and your score may show an improvement.

3.Credit utilization effect

 If you are using a balance transfer card to consolidate your debt, then as your available credit increases, your utilization ratio and therefore your score will also see an improvement.

However, if you transfer all of your debt to this new card and its used credit gets close to the available credit, then again, your score may be harmed.

But, if you use a personal loan for consolidation, then your total available credit will increase (provided you don’t close your credit cards). This in turn may improve your credit score.

4.Taking on more debt after consolidation

Once you’ve freed up your existing cards post debt consolidation, don't rack up more debt using those credit cards.

If you give in to the temptation of using those credit cards to spend more, then it will increase your credit utilization ratio and further damage your score.

Having said that, make sure you are not being overly fearful and close those credit cards altogether. If you do so, your available credit limits will drop, your credit utilization ratio will increase, and your credit score will fall.

The best way to stop using existing credit cards is to remove automatic payments and saved details from any online shopping accounts. Put your cards out of reach from use so you do not have regular access to them until you've paid off your consolidated debt.

$50,000 - $250,000 of unsecured credit at 0% interest:

At Fund&Grow, our team offers clients with good credit the opportunity to obtain $50,000 - $250,000 at 0% interest.

Available for a period of 6, 12, or 18 months, this amount is unsecured and can be used for any purpose, from financing a small business to providing a down payment on a property.

If you, or someone you know, is in need of this kind of financing, please call us to find out if you qualify.