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How a Debt Consolidation Loan Can Affect Your Credit Score

by The Daily Buzz Team
in Finance
3 min read
How a Debt Consolidation Loan Can Affect Your Credit Score

Managing debt across multiple credit cards and loans can quickly become unmanageable. It’s likely that each is going to have a different interest rate and minimum payment.

Alleviate financial debt relief got you cover with any debt management options you may need.

More importantly ‒ unless the stars really align ‒ they’re all going to have different due dates for payments each month.

All of these shifting variables can be confusing and cause you to fall behind on payments, only plunging you further into debt.

A debt consolidation loan can function as a simple and effective method for managing and paying off your debts quickly and painlessly.

A consolidation loan is essentially a lump sum that you use to pay off your individual debts.

Once that’s done, you simply pay off the balance on the loan in lieu of paying off a bunch of smaller debts each month.

It’s often relatively easy to get approved for one, and if you play your cards right, you could even score a lower interest rate across the board.

But, just like any other loan or line of credit, a debt consolidation loan can impact your credit score for better or for worse.

Positive Impacts of a Debt Consolidation Loan

The main goal behind a debt consolidation loan is the simplification of your finances. In theory, this should make paying your debts on time a breeze.

This is important because your payment history is regarded as one of the most influential factors when determining your credit score, so your new and improved payment history should eventually lead to a rise in your score.

Credit scores and how they are calculated can be tricky. Lenders want you to use and pay off your credit, which will increase your score over time.

At the same time, using up too much of your total available credit can actually hurt your score.

Your credit score is best served by keeping your credit utilization ratio ‒ a.k.a. how much of your credit you’re using divided by how much total revolving credit you have available ‒ low.

By paying off your credit cards all at once with a lump sum from a loan, you can instantly lower your utilization ratio (even though you’re still paying off that loan).

Taking out a personal loan might also improve your credit mix.

While credit mix doesn’t play a tremendous role in your credit score, it definitely has some bearing on it, because lenders like to see that you can responsibly manage a diverse array of credit.

If you’ve only got credit card debt, taking out a consolidation loan will add a new type of credit to your mix and potentially improve your score.

Negative Impacts of a Debt Consolidation Loan

Applying for any line of credit can lower your score depending on what type of credit check a lender performs. A hard inquiry on your credit report will lower your credit score by a few points.

This dip is often small and temporary but don’t discount it altogether.

The fact that your consolidation loan will be viewed by lenders as a new account might also temporarily reduce your score by a few points.

It will also reduce the average age of your credit. New credit is seen as a risk to lenders, which is why a proven track record of on-time payments is extremely important.

Taking out a debt consolidation loan ‒ or any loan or line of credit ‒ comes with a certain level of responsibility.

Falling behind on or missing loan payments will negatively impact your score in the same way that missing credit card payments would.

Make that you can stick to the terms of your new loan, or you’ll risk further damaging your credit.

The Daily Buzz Team

The Daily Buzz combines the pursuit of interesting and intriguing facts with the innate human desire to rank and list things. From stereotypical cat pictures to crazy facts about the universe, every thing is designed to help you kill time in the most efficient manner, all while giving you something to either laugh at or think about!

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