When it comes to credit scores and blemished credit histories, is debt consolidation bad for your credit and how does it affect credit score?
Did you know that almost 40% of Americans have either a poor or bad credit score? If you are currently struggling with keeping up with multiple payments from student loans or credit cards every month you might be considering debt consolidation. Are you wondering is debt consolidation bad for your credit?
We are going to share more about, if and how it affects your credit score.
What Is a Debt Consolidation Loan?
Before we dive into how your credit is affected let’s talk a bit more about debt consolidation loans and what exactly they are. The easiest explanation is – it’s a loan that will combine all of your loans into one loan. This new loan will more than likely have a lower interest rate and a lower payment.
This type of loan will save you time and stress of keeping up with all of your lenders. Instead of paying each one individually every single month, you will pay one large sum to only one lender.
Is Debt Consolidation Bad for Your Credit?
There are a few ways that a debt consolidation loan will affect your score either positively or negatively. If you are on time with your loan payments every month it will help your credit score. You will slowly see your credit score go up as you consistently make your payments on time.
Once you start eliminating your balances or reducing them to less than 30% of your credit limit you will also raise your credit score.
A deb consolidation loan will also diversify your lending profile. This will impact your score in a positive way because it will show that you are responsible with different types of credit.
One way that debt consolidation can affect your credit score in a negative way is if you are ever 30 days late or more, your credit score will go down. Late payments and missed payments are one of the biggest factors on your credit score.
Your credit score can also go down if you do not change your spending habits and continue to charge items on your credit cards after paying off your balances. When your credit utilization goes down your score goes up, so if you choose to continue charging after paying off balances your credit utilization will go up. This will, in turn, decrease your credit score.
Time to Make a Decision
Now that you know the answer to the question “is debt consolidation bad for your credit?” you can make an informed decision. It might be worth it to take out a debt consolidation loan if you have too many payments to keep up with each month. In the long run, a debt consolidation loan can really help you when you change your spending habits and you stick to your loan payment agreement.
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