Will consolidating your debt help your credit score?

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Debt Consolidation


From juggling multiple credit cards to your home’s mortgage, car payments, and student loans, dealing with debt can be stressful. As you make decisions to help manage your finances, you may consider consolidating some or all of your debt into one convenient payment. There are many benefits to combining your debt; like the opportunity to give your credit score a positive boost and remove strain from your financial obligations.

Debt Consolidation Non-Credit Benefits

Combining multiple debts into a single consolidation loan isn’t just beneficial to your credit score; it can also make your monthly financial obligations more manageable.

First, having your debt spread across multiple accounts exposes you to a lot of different interest rates and agreements. With the most common credit card interest rate averaging at 15%, this could mean shelling out hundreds of dollars a year or even months in interest alone. Making the decision to consolidate your debt into a 0% APR card or a personal loan can cut down on unnecessary finance costs. Many borrowers even use the money that they save to eliminate their balances even faster.

The second advantage to debt consolidation is moving your monthly payments from multiple accounts to just one. This can simplify your financial life by making it easier to budget and manage debt.

Debt Consolidation Credit Benefits

Besides taking strain off of your monthly financial responsibilities, consolidating your credit card and other debts to a single account can boost your credit score. If you make the decision to consolidate your debt to a personal loan, your score can experience a jump in as little as a few months.

The reason behind this has to do with credit utilization. In most credit score models, credit utilization determines as much as 30% of your credit score. Credit utilization is the ratio between your debt and your available credit. If you have several cards that are maxed out, your credit utilization is likely hurting your score.

However, only balances on revolving lines of credit are factored into your credit utilization ratio. Moving credit card debt to a personal loan will shift your obligations in such a way that there will be a minimal amount of impact on your credit, in addition to improving utilization on your cards. This type of debt consolidation will likely improve your score.

Considerations

Before you make the decision to consolidate your credit card debt, it’s important to take several things into account. First, how is your credit score? If your score is less than average, it may be difficult to qualify for a reasonable interest rate on a personal loan or a 0% APR card.

Second, it’s a good idea to take a look at the fees involved. Personal loans still come with their own terms and costs, and most lenders charge a balance transfer fee in order to transfer debts to a 0% card. Consider these fees and conditions before you decide if debt consolidation is the right move for you.

Last but not least, ask yourself if you have genuinely changed your ways. The need for debt consolidation often signals an even bigger problem or habit, such as overspending on credit cards. Examine your spending habits and make necessary changes. Keep in mind that if you consolidate your debt and miss a payment, the agreement with your lender may become void and you’ll be required to pay regular interest rates right away.

Consolidating your revolving debt can be a great way to raise your credit score fast. However, like any other financial decision, you’ll want to consider your habits, financial capability, and benefits before moving forward.



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