Credit score becomes the most crucial issue that can be affected by loans and debts. Even though debt consolidation becomes the most effortless solution for your multiple debts. However, there is a credit score impact of debt consolidation loans once you have missed monthly payments.
To learn more about debt consolidation and how it would damage your credit score, you are in the right place! You can scroll down this article to gain more information about the issue.
Credit Score Impact of Debt Consolidation Loans
Debt consolidation is basically merging your multiple debts into a one-time payment. It would be beneficial to save you money and make payment easier. However, if you are not concerned about the policy, debt consolidation would affect your credit score. What are the factors that would damage your credit score?
1. High Credit Card Rates
The first concern of applying for debt consolidation is your credit requirement. The credit score impact of debt consolidation loans occurs once a hard credit check ding a few points off your credit score.
However, your credit score would be temporarily decreased between 5 and 10 points. Fortunately, your credit score will be overcome after you make a few monthly payments.
2. Increase Debt Load
Without you realize, moving your existing credit card with your current balance to a new card would ding your credit score. Hence, opening a new credit equivalent to remove a debt consolidation policy would cut down your credit score slightly.
Too much debt would make the credit score impact of debt consolidation loans to be crucial. For instance, if you have your current credit card with debt and loan, then you can open a new credit and move the available balance. This circumstance means you are adding more debt to your credit and reducing the score.
3. Possibility of Missed Payment
Debt consolidation is indeed helpful to merge all your debts with one-time payments. Yet, you would experience the credit score impact of debt consolidation loans due to missed payments during the period. You should be aware of monthly payments and consistently make payment history on time to avoid mistakes that can affect your credit score.
4. Shorter Credit History
Furthermore, credit history would affect your credit score once you add a new loan to your report. A credit scoring system would take your oldest account, newest account, and average account age to consider your credit history. The shorter your credit history would damage your credit score.
The Positive Credit Score Impact of Debt Consolidation Loans
On the other hand, debt consolidation brings peace to your credit score. How does it work? Take a look on the explanation below!
1. On-Time Payment History
Debt consolidation merges your multiple loans with a one-time monthly payment. Thus, your payment history would play a big role in your credit score calculation. The credit score impact of debt consolidation loans would be minor if you make the monthly payment on time.
2. Improve Your Credit
Moreover, loan payments with your credit card will increase the current available credit on your card. The reduction occurs in your total credit utilization to improve your credit score. However, carefully use your new credit since it would be positive for your credit score if you use it with a limit.
3. Improve Credit Mix
Debt consolidation is available to mix your credit which improves the FICO score by up to 10%. Credit mix including installment loans, personal loans, credit cards, and debt consolidation would be positive to your credit score.
Solution to Protect Your Credit Score
Regardless, credit score can be protected if you know some tips to make it stable. What can you do to protect the score for your credit and avoid credit score impact of debt consolidation loans to be negative?
1. Check Your Credit
The first thing you can do to protect your credit score is to ensure your credit before applying for loans or debts. Based on the FICO score average, there are 5 types to determine the credit score. Here is the list.
| Score | Category | Description |
| <580 | Poor | This rate is considered to be risky borrowers and would so hard to get approval from lenders. |
| 580-669 | Fair | Below average score in the U.S., yet consider it to be easier to get approval from some lenders. |
| 670-739 | Good | A slightly above-average score and considered to be a good credit score. Lenders would like to approve this rate. |
| 740-799 | Very good | The dependable credit score to get approval from lenders. |
| >800 | Exceptional | The most capable credit score to get loan approval from all lenders. |
Hence, you can check your credit score first to be able to maintain it at at least good rates. If you use your credit cards with debts and loans without acknowledging your credit score, it would be over the limit and cut down. The negative side is you will hardly get approval from lenders for quick funds.
2. Pay Debt On-Time
The credible way to protect your credit score is to pay debt consolidation on time. Your payment history matters a lot to calculate your credit score before applying for debts or loans. The more you miss the debt payment, the higher the possibility of hurting your credit score.
This requirement become a crucial consideration for all lenders. Lenders can see your capability to pay off the debts and loans over the period. Debt consolidation would make your monthly payment easier since you only need to pay merged debts at once.
3. Compare Loans Policy
Moreover, comparing loan policies before applying for one would protect your credit score. By learning the loan policy you would acknowledge how to maintain your interest rate. You can find the policy that suits your current rate and would not hurt your credit score.
Is Credit Score Impact of Debt Consolidation Loans Always Be Negative?
Debt consolidation is truly the best move to save your debt and finance by merging all the debts with the one-time payment system. However, debt consolidation could be harmful to your credit score if you do not be aware of some circumstances. Thus, you have to consider observing the solutions to protect your credit score.
The most effective move to avoid the credit score impact of debt consolidation loans is to pay your debts on time. Additionally, you can maintain your credit score by wisely choosing loan policies that suit your finances. Debt consolidation is not always harmful to your credit score if you acknowledge the issue.