Do you think using debt consolidation can help improve your credit score? Of course, you can! It is one of the debt solutions that have the ability to help you hit two birds with one stone. If the huge amount of debt that you owe caused your debts to taint your credit report, paying it off through debt consolidation can do something about that.
And when it comes to owing a lot of money, there are a lot of Americans struggling with that issue. Most American consumers have more than one type of debt. According to reports from the New York Fed, an increasing number of people owe auto loans, student loans, and credit card debts. While mortgages are currently at its lowest, the amount involved is still quite high.
Since the amount of debt that you owe affects your credit reports, having a lot of debt would mean negatively affecting your credit score. If you can pay your debts off, that can slowly bring your score higher.
The truth is, any debt solution that will help you pay off your credit obligations can improve your credit reputation. However, there are options that will make the payments and credit improvement a lot easier. One of these is debt consolidation.
Consolidating debts mean you will combine your multiple credit balances under one credit account. You will end up having a single debt that you can easily monitor and pay off. The total amount that you owe may still be the same, but it would be easier to keep track of the payments since you only have one debt to take care of each month. It will be easier for you to budget your monthly cash flow to ensure that your debt payments will always be funded.
2 ways your credit score will improve after debt consolidation
Thanks to the way debt consolidation restructure your debts, it should be easier for you to meet all your payment obligations. That can lead to two important financial situations that can definitely improve your credit score.
Miss fewer payments
Let us assume you have 5 credit cards and you borrowed a debt consolidation loan to pay off all of them. Instead of having 5 different payments to meet every month, you now have only 1. That means you only have to keep track of one payment. The chances of missing a due date will be unlikely to happen. You can easily set it up so you can automatically pay it off. With you making timely payments, you can expect your credit score to start rising steadily as you complete your credit obligations.
With only one payment, it also becomes easier to create an effective debt repayment timeline. You can easily identify the end of your debt relief program. That way, you can set up other financial goals that you can work on after you have achieved complete debt freedom. If you want to buy a house after paying off your debts, you will find enough time and focus to work on that as well. You can save up for that goal as you pay off your dues. While this will not have a direct effect on your credit score, it will have a positive effect on your personal finances. In the long run, that can have a huge effect on your credit history.
Better chance of completely paying off debt
The second way that debt consolidation can help improve your credit score is having the certainty of achieving debt freedom. Obviously, this debt solution made your debt repayment easier. Anything that becomes easier makes the task achievable. Not only that, if you are not intimidated by the task that you have to complete, there is no need to worry. You do not have to stress too much about what you have to do. You will find that your mind is free to come up with ideas to improve your financial situation. For instance, you can find ways to increase your income to pay off your consolidated debts. With a higher income, you can make bigger payments. That would mean getting out of debt faster.
Of course, the sooner you get out of debt, the faster you can give your credit score a boost. With an improved credit reputation, more financial opportunities will open. You can use that to improve your financial situation as soon as you send your last debt payment.
How to keep a good credit score during debt consolidation
Although it is clear that using debt consolidation to improve your credit score is a good idea, it requires consistent effort to really make it happen. Even if you already have a high score, that does not mean you should be reckless. That score has to be maintained. That means you need to make the right decisions all the time. Your financial choices, specifically those involving credit, will influence the rise and fall of your credit reputation.
The good news is, you can start rebuilding your credit score right after you have consolidated your debts. Here are two important tasks that you should focus on.
Make timely payments
When it comes to making timely payments, consumers are starting to make improvements. According to reports, delinquency rates are quite low despite the increasing amount of consumer debt. When a debt is considered delinquent, that means it is more than 90 days since the due date has passed. If you really want to improve your credit score you need to make sure that every payment is on time. Late payments affect 35% of a FICO score. The other credit score models also put high regard on timely payments. As long as you are consistent with your debt consolidation payments and you submit them on time, you should be okay.
Stop borrowing more
Credit utilization is also an important influence in your credit score. This is the ratio between your credit balance and limit. The more balance you have or the closer it is to your limit, the lower your score will be. This is why you need to hold back on borrowing money while you are paying off your consolidated debts. Every payment will lower your credit utilization rate and increase your score. But once you use credit again, your progress will be for nothing. This is why you need to stop using credit – at least until after you have completely paid off your debts.