Debt consolidation is a popular option for those looking to pay off their existing debt with a new loan or line of credit. It's important to understand how debt consolidation affects credit scores, as the application process and the loan itself can have an impact. Evaluating the pros and cons of debt consolidation and how it could affect your credit score is essential to decide if it's the right path for you. In general, taking on any type of new debt to pay off old ones will lower your credit rating, even if only temporarily. Every time you formally apply for credit, the creditor conducts a thorough investigation, also known as a withdrawal of your credit, to check your creditworthiness.
Usually, every thorough consultation lowers your credit score by a few points. If you're looking for options and applying for debt consolidation loans at several banks at once, your credit could be temporarily affected. Fortunately, when you calculate your credit score, you often combine many important inquiries over a given period, from 14 to 45 days, into one. Debt consolidation helps you pay off existing debt with a new loan or line of credit, preferably one with more favorable terms, such as a lower interest rate. If you're going through the debt consolidation process, it might be wise to close your old accounts after a balance transfer or apply for a new loan. While you may be approved for a loan, the interest rates offered to you are likely to be high and will negate the savings you were hoping to achieve by consolidating your debt.
Consolidating your debts can also help you improve your overall financial situation, making it easier to control your other debt payments. However, if consolidating your debts into a new loan with a lower interest rate makes it easier for you to make payments on time, debt consolidation could help improve your long-term credit score. To estimate how debt consolidation may affect your credit score in particular, check out WalletHub's free credit score simulator. Debt consolidation has the potential to improve or hurt your credit score, depending on the method you use and how diligent you are with your repayment plan. Before you are approved for a debt consolidation loan, lenders will evaluate your credit reports and credit scores to determine if and under what conditions they offer you a loan. If you're having trouble paying bills or want to pay off your debts faster, debt consolidation could be a solution. Debt consolidation loans are unsecured, meaning the borrower doesn't have to risk an asset as collateral to back up the loan.
A debt consolidation loan or credit card with a balance transfer can hurt your score because of the arduous application process and the drop in the average age of your accounts. However, these types of secured loans are much riskier for the borrower than a debt consolidation plan, as the borrower's home is used as collateral and non-payment can result in foreclosure. If you get a debt consolidation loan or a credit card with a balance transfer, most of the time the lender will thoroughly investigate your credit history. If your credit score is lower than 580, you may still qualify for debt consolidation, but your APR could be much higher than your current debt rates. In the long run, debt consolidation is likely to have a positive effect by increasing your credit rating if you make your monthly payments on time.
