Does Debt Consolidation Affect Your Credit Score?

If you owe too many creditors, one creative solution you can use to deal with the challenge is debt consolidation. By consolidating the debts, you put the accounts in one place where you enjoy a low-interest window as you pay your debts.   Debt consolidation can hurt or help your credit score depending on your choice of method and how you stick to your payment plan. But, even if debt consolidation hurts your credit score, it’s only temporary.  You also have several ways you can use to lessen the negative impact of debt consolidation on your score and use it to build the score with time. 

How Debt Consolidation Can Lower Your Credit Score

Debt consolidation involves taking one to pay off others. It can be through a balance transfer credit card or a personal loan.  However, it can hurt your credit score in various ways. For instance, if you use a balance transfer credit card, you’ll have challenges if the new card has a lower limit than your first one.  The higher the percentage of credit limit, the worse it’s on your score.  The addition of a new account for debt consolidation can also lower the average age of other accounts. Thus, it negatively impacts the length of your credit history. 

How Debt Consolidation Can Raise Your Credit Score

It’s not always that consolidating your debts can negatively affect your credit score. At times, it can work in your favor. For instance, if you strive to make timely payments of your balances, positive payment history will help raise your credit score in the long run. Therefore, ensure you make timely payment of your debt a priority since the positive history is crucial in determining your score. If the balance transfer card comes with a higher credit limit than the original card, it can raise your credit score. Likewise, a lower utilization rate can raise your credit score. 

Ways of Debts Consolidation 

Debt consolidation helps merge loan balances or multiple credits into a new single loan.  If you want to consolidate your debts, you have several ways you can do it.  For example, you can get a personal loan with lower interest to help you pay the higher interest credit card bills. The strategy can help you pay your debts faster and it’s less stressful.  You can also get a bank transfer card. The cards have periods when they charge no interest or low interest. Thus, they offer you an opportunity to save on interest.  You can also consolidate your debts by taking a loan from your retirement account to pay off debt. However, you should be careful with this method as failure to repay it according to the retirement rules attracts penalties and taxes.  A home equity loan can also help you consolidate your debts. Here, you take a loan to pay your other loans and use your home as collateral. The loans have lower interests than credit card bills or personal loans. Failure to repay your loan could result in losing your home.    Click here to learn more about debt consolidation.