Does a Debt Consolidation Loan Hurt Your Credit?
Many people worry that taking out a debt consolidation loan will damage their credit rating. In fact, the opposite is true. When used properly, a debt consolidation loan can actually help improve your credit score. In order to understand how this type of loan helps, rather than hurts, your financial situation, it's important to consider how your credit rating is calculated. Here are a few ways a debt consolidation loan can help boost your score.
Current Credit Account Balances
Carrying high balances on credit cards, loans, and other credit accounts can have a negative impact on your credit score. Lenders use your outstanding debt amounts as a benchmark in determining how likely you are to repay your loan. If your credit report shows multiple maxed out credit accounts, you may be denied financing altogether. By taking out a debt consolidation loan, you effectively wipe out all of your outstanding credit card balances. Your credit report will then show only one monthly debt obligation.
Payment History
Another thing lenders will look at when determining your credit worthiness is your payment history. Late and missed payments lower your credit score, as do bankruptcies, consumer proposals, judgements, and liens. Combining your monthly bills into a single debt consolidation loan payment is a great way to simplify your budget and avoid late or missed payments.
Credit Utilization Ratio
Closing credit accounts can have a negative effect on your credit score, as it increases your credit utilization ratio (the amount of debt you have compared to the total amount of credit available to you). In many cases, taking out a debt consolidation qualifies you for free credit card balance transfers. This allows you to pay off your balances without closing the accounts, causing your credit score to go up.
Consolidating your debt can be a useful tool for getting back on track financially, but it's important to consider how this type of lending will affect your credit score. Contact us to discuss whether a debt consolidation loan is the right solution for you.
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