Are you drowning in debt and looking for a way out?
Collectively, American households carry a whopping 13.21 trillion dollars of debt. If you are like millions of other Americans, you have probably been weighing your options and wondering how clear your overwhelming debt and get back on your feet.
Debt consolidation loans seem like the best option but many people are unsure if taking out this type of loan will help or hurt, their credit.
If you have been considering debt consolidation but want more information, this short and simple guide is for you.
Debt Consolidation: A Brief Overview
Debt consolidation involves taking high-interest debt, such as a credit card, and rolling it into a single, low-interest account. By consolidating your debt, you are saving money on high-interest payments, and making repayment simple and easy.
If you are overwhelmed with debt and have many open accounts that are falling through the cracks, debt consolidation may be the answer for you.
How Debt Consolidation Hurts Your Credit
Any movement on your credit report that is not positive carries a risk of negatively impacting your credit score. In the initial stages of your debt consolidation, you will need to complete some tasks that will affect your credit score.
As a result, your credit score will drop due to:
Hard Inquiry: a hard inquiry, occurs when a creditor checks your credit to see if you qualify for a card or a loan. Hard inquiries stay on your credit report for 2 years and can negatively impact your credit score.
Average Credit Age: the average age of your accounts is used to predict your credit risk and creditworthiness. Opening a new account for debt consolidation can reduce your average age and impact your credit score.
Consolidating your debt will hurt your credit score, however, the effect is temporary. Over time, debt consolidation will improve and boost your credit score.
How Debt Consolidation Improves Your Credit
Taking out a debt consolidation loan will help you get out of debt and raise your credit score. Once your debt consolidation loan is approved, you will see improvements to your score and report due to:
Credit Utilization Ratio: the amount of credit you have vs. the amount you have used is your credit utilization ratio. By consolidating and paying off your debt, you will reduce your utilization ratio and improve your credit score.
Payment History: paying your consolidation account every month will help you rebuild your payment history. Positive payment history on your credit report is great for improving your credit score.
The improvements to your credit score from debt consolidation can be life-changing and set you up for a more stable financial future. If you are interested in consolidating your debt, don’t hesitate to learn more about the process.
Consolidation Loans and Your Credit Score: The Bottom Line
Will consolidation loans hurt your credit score? Yes, but only temporarily. Over time, debt consolidation will help improve your score and give you a brighter financial future.
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