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The Impact of Debt Consolidation on Your Credit Score

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You should roll over your debts into a single account in several instances. When you have multiple loans you need to pay off, it is better to manage them under a single account. This can also give you a low-interest debt consolidation loan rate, making the repayment process more comfortable. 

When you combine several debts into a single one, you can get a better payoff. However, there are also instances where it can lower your credit scores. As such, your creditworthiness remains central to any debt-elimination process. 

Today, I will discuss the impact of debt consolidation on your credit scores—two noteworthy instances: one when your credit score increases and the other when it is lowered. Let’s explore them briefly.

Instances when your score is increased

Many people use a rolled debt strategy to improve their creditworthiness over time. Some situations where that can happen are-

  1. Timely payments: Your payment history is arguably the most critical factor determining your score. With a consolidated debt account, you can better and more regularly manage your payoffs. With all your loans collected into one account, it’s easier for you to eliminate them through confident and regular payments. This works in your favour to make you debt-free early and improve your score.
  2. Lower credit utilisation rate: Once your credit card debt is carried over to a balance transfer card with a higher limit, you can lower your credit utilisation. It is essential to be frugal with your CUR and keep it low. The lower the usage, the higher your score. A rate lower than 30% is desirable. However, for a truly stellar score, you should keep it below 10%.

Instances when your credit score is lowered

There can be cases where a consolidated debt reduces your credit scores. They are:

  1. Higher CUR: If your balance transfer has a lower credit limit than your original card, you might utilise more of your credit. As mentioned earlier, keeping your CUR low for a high score is necessary. This can also hinder you from getting in on a debt management plan. 
  2. Decreased credit history: When you transfer your debt to a balance transfer account, adding a whole new account can reduce the length of your credit history. Generally, a more extended history with regular and consistent payments is better for your credit scores. That’s why, as a rule of thumb, you should only take extra credit if needed. 
  3. Credit inquiry: Whenever you take on a loan, the lender will want to look into or enquire about your creditworthiness to make sure you can pay off your debts. This happens in the form of a hard inquiry where the creditor wants to look at your credit file to check the level of risk you pose. This inquiry reflects on your credit report, which can slightly lower your score. 

Conclusion

With this article, I have explored how a consolidated loan can affect your credit score. While a rolled-over loan can help you better manage your debts, you should strategise wisely about eliminating them. Otherwise, it can reduce your overall creditworthiness. Now that you know how these scenarios unfold, you can make more informed decisions about your debts and payoffs to ensure excellent financial health. 

That’s not all; you can better judge which low-interest debt consolidation loan rate to choose and how it can help you improve your credit score.

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