There are debt consolidation loan effects on your credit history that you should probably be aware of. At least, this is true if you really want to improve your financial position after debt relief. You need to understand how all of these will influence your finances because it might affect your future financial goals.
Having a good credit score is a must if you want to be able to use debt to your advantage. Yes, believe it or not, debt can be used to positively affect your life. For instance, a student loan is a type of debt that you can use to improve your knowledge and skills so you can qualify for a higher monthly salary. However, there are times when these debts accumulate to a point when it becomes harder to pay off. When that happens, it can affect a lot of things in your life. Reports reveal that student loans have started to affect the ability of young adults to buy their own home.
Fortunately for borrowers, debt consolidation loans can be used to deal with various types of debt. It can be used for credit card debts, student loans, and even mortgages. The great thing about this is that the debt consolidation effects on your credit history are a mixture of positive and negative. If you understand what these effects are, you can approach debt consolidation with a strategy that will minimize the negative effects and maximize the positive ones.
Negative effects of debt consolidation loan on credit scores
There are the debt consolidation realities that can possibly compromise your way towards debt freedom. To get you started, let us identify the debt consolidation loan effects that have a negative impact on your credit score.
Hard inquiry for new credit applications
Consolidating debts usually involve new credit accounts. This is where you will put your multiple debts so you can combine them into a single payment. The thing is, the lender or creditors will conduct a hard inquiry on your credit report as part of the approval process of your application. This will negatively affect your score and pull it down by a couple of points.
New credit accounts are considered as risks
Another thing that will negatively affect your credit report is the fact that a new credit account is basically viewed as a new risk. It may be true that you will use this new account to pay off your multiple debts – which is the actual process of consolidating the debt. However, the paid debts will not be reflected immediately. That means for a short time, your credit report will reflect double of the debt that you owe. It will only be after the consolidation is done that the balance will show that the debt is still the same. Before that, expect your score to go down for a moment.
Lower credit age average
Finally, a new account will pull your credit age average down – and that will lower your score. This is one of the debt consolidation loan effects that might have a longer pull on your credit report. When you have older accounts, it means that you are responsible enough to maintain your credit accounts. If the average age changes because of a new account, that will automatically affect your score.
At the moment, the average credit score in the country is high at 695. If you really want to use debt consolidation loans to solve your credit issues, make sure your score is high enough. That way, when the consolidation process causes your score to go down, it will not be too bad.
Positive effects of debt consolidation loan on credit reports
Even if the debt consolidation loan effects bring your credit score down, do not fret. It will not be permanent. As long as you stick to your payment obligations, you can improve your credit score after a few months.
Here are some of the positive debt consolidation loan effects that you can get if you implement this debt solution properly.
Improved credit utilization rate
One of the benefits of using debt consolidation loans is improving the balance-to-limit ratio in your credit report. Once you have paid off your multiple debts ad consolidated it into one, you will find that your credit utilization ratio will go down. This will have a positive effect on your credit score. If anything, it might even counter some of the things that caused your score to go down after consolidating debts.
Better payment history
Another positive effect that you can expect is having a better credit history. This will not be evident immediately. But since you only have a single payment to meet, it is not easier to commit to it. That means you can improve your payment history and this can significantly affect your credit report. As you meet your monthly payments, you will see your credit score rise steadily.