How can debt consolidation affect Your Credit Score?
The burden of having multiple credit cards and loans that have different due dates and balances can be too much. If you’ve thought about consolidating your debts you may be wondering what the implications of this decision will be on your credit score. Every loan you take out could affect the credit rating of yours, however whether it’s the right choice for you in the long and short-term–depends on your financial situation. Consider debt consolidation in depth before making your final choice.
What is Debt Consolidation?
The term “debt consolidation” refers to the process of taking out an additional loan to pay off the balances of earlier loans. The new loan assists in turning your numerous loans and installments into a single loan that has one monthly installment and an adjustable or fixed percentage of interest. If you’re struggling to track a variety of monthly expenses and don’t want to be a risk of paying late it might be worth considering consolidating debt. Also, if rates of interest you pay are very high, you may be able to secure lower rates of interest through the help of a debt consolidation loan.
Factors in Debt Consolidation to Take into Account that could affect your credit Score:
1.) Credit Check
If you are applying for a loan the lender conducts an “hard” credit investigation by asking for your credit report and scoring. These inquiries can affect the credit rating of your. These inquiries inform the lenders that you’re looking for a new loan and could be in your credit file for up to two years, however they generally will affect the credit rating for a single year.
2.) Averaging Age Your Accounts
One of the main factors that determine the score of your credit is how long you’ve held the accounts which appear on your credit file. The credit bureaus evaluate the average the age of your accounts and the time you opened a new account as well as the age of your oldest credit card. It is generally accepted that more credit-worthy you are is, the better it’ll improve the credit rating.
If you open more credit cards, such as the debt consolidation loan The average age of your accounts declines and this can adversely affect your credit score. However the average credit card age will grow with time This portion of your credit history only is around 15 percent of your credit score.
3) Credit Utilization
The credit bureaus look for a utilization rate under 30%. Therefore, if you are able to repay revolving lines credit, such as credit cards, with the help of a debt consolidation loan you will reduce the rate of utilization in your credit report. This will increase your score in the course of time. For instance, if the credit limit for a card is $10,000, and you’ve only used the sum of $9,000 then your credit utilization is 90 percent.
4.) Pay on time
Paying on time is one of the most significant aspects of your credit score, and are responsible for around 35 percent of your credit score. If you have multiple of bills that you have to pay each month, it could be challenging to track your monthly installments and pay the payments on time. If one consolidated loan payment can help you make your payments on time, you could strive to make more timely payments and establish better credit.
5.) Cash Flow
A debt consolidation loan could offer you better terms and a smaller monthly installment than the total monthly payments for all of the other loan you have. If you do this you can increase your cash flow overall however, it is important to ensure that you budget for the larger, single amount. If you’re applying for a new loan you must examine your financial situation and habits to determine which one will work for you.
Are you still unsure about the idea of consolidating debt? Consult a financial advisor or browse online for resources such as credit.org, an company that is dedicated to helping educate consumers on the financial aspects and debt management.
If you are deciding to take out If you decide to take out a debt consolidation ln contact an agent from Mariner Finance, LLC. We’re dedicated to offering our customers with the best service that we can provide.