How Debt Consolidation Affects Your Credit Score

Taking out a debt consolidation loan to pay off your existing credit card debts and other loans has the potential to impact your credit score in both positive and negative ways.

By taking out the debt consolidation loan or looking at other financing options to consolidate your bills, you are settling the credit card debt that you have been owing money and reduce your credit utilization ratio.

When your credit utilization ratio drops, your credit score will increase. To see increase in your credit score, you must have only one type of debt account and you must keep the account open. Many people claim that they seen an increase of about 20 points after 3 months.

Debt consolidation can also hurt your credit score in some ways. For example, transferring too much balances into the new balance transfer card can result in a higher utilization ratio and hurt your credit score. Most importantly, you want your old account to stay active and you don’t want to max out your balance transfer card. For this reason, if you use balance transfer card to consolidate your loan, make sure you pay a significant amount every month so that you can clear off the debt faster.

One thing that most borrowers feel good about is that you should not worry too much about your credit score getting affected after taking out the debt consolidation loan. What is more important is that it is now easier to manage and pay off your loan. Your credit score will rise progressively as you make prompt repayment.

The reason is because payment history accounts a significant percentage of your credit score. All your payment history will be reported to the credit bureau. It is important to only apply for the debt consolidation loan with a creditor that report to the credit bureau about your payment.

If you are planning to take a loan to make a large purchase, it is best not to take out the debt consolidation loan now as it can cause your credit score to drop. Instead, you can sign up for the debt consolidation loan after making the large purchase. Another situation where you should not take out the debt consolidation loan is that you know you have bad spending habit and cannot control yourself.

The best place to get a debt consolidation is via online personal loan. You can also apply for personal loan at your local credit union for debt consolidation purpose. Online personal loan can lend you up to $35,000 to repay your creditors.

When you shop online, you have the option to choose from online lender or p2p lender. A must take step prior to applying for loan is to get preapproved to check the interest rate. You also must not forget to take into account other fees when deciding which lender to apply for the debt consolidation loan.