The vast majority of people have to deal with debt throughout their lives, and that debt can come in a variety of forms, including personal loans and credit cards. Having to manage all those different kinds of debt, keeping track of different monthly payment schedules and staying up to date with different interest rates, can be challenging.
This is why a lot of people turn to debt consolidation. Effectively, debt consolidation works by combining all of your credit cards and low-interest loan debts together, giving you a new loan with a favorable interest rate and just one monthly payment to worry about. As well as credit cards, the following types of loans and credit can be consolidated:
Do debt consolidation loans harm your credit score? What kind of effects can they have on your credit score over time? Will debt consolidation loans make it harder to get other loans in the future? There are all valid questions and it’s certainly wise to think about all the ins and outs of consolidation before actually going ahead with it.
Typically used by people with multiple credit cards and personal loans, debt consolidation loans can be really useful to help you pay off your debts easily and simply each month. Let’s take a look at the pros and cons to see how these loans can appeal and what kind of downsides they also have.
So, we can see that debt consolidation loans come with both pros and cons to consider, but how do these loans actually affect your credit score?
The first thing to note about debt consolidation loans and your credit score is that the effect these loans will have on your score will vary from one person to the next. It really is a case by case matter, and this is why it’s important to speak to the experts and credit counsellors to get the full overview of your debt situation. However, in general, you can expect to see a small dip in your credit score at first. The very process of applying for a debt consolidation loan can trigger a little drop in a credit score.
However, over time, debt consolidation loans can actually improve your credit score. Let’s not forget that the whole purpose of a debt consolidation loan is to make your payments and debts easier to manage. By taking out this loan, you should be finding it easier to make payments on time each month. By paying off your debt in this way, your credit score will start to rise.
Then, once you actually get to the end of the payment period and are able to fully pay off your debts, your credit score can see a huge boost from the various loans and credit cards you’ve successfully been able to pay off. In short, getting and successfully paying a debt consolidation loan can have a great effect on your credit score in the long run, but do expect a small dip at first. Of course, you can also expect the score to decrease if you fail to make payments on time, just like with any other debt.