Arizona Tribune - Does Debt Consolidation Hurt Your Credit Score?

In this post, we'll explore what debt consolidation is and how it might affect your credit score.

What is debt consolidation?

A debt consolidation loan is a personal loan that people use to pay off their existing debts. Typically, it helps to eliminate problematic loans or credit card debt that may have variable or high interest rates. The funds from a debt consolidation loan are used to pay off these balances, leaving you with a new loan with a lower interest rate and more predictable, manageable payments.

Just be sure to understand that, depending on how long your repayment term is, you may sometimes wind up paying more interest over the life of the loan than you would have if you hadn't consolidated your debt. If that's the case for you, you'll need to decide whether managing debt with smaller, more predictable monthly payments is worth the extra cost.

How debt consolidation affects credit scores

Several factors in your credit history help determine your credit score. The credit bureaus publish how they weigh these factors so that borrowers can better understand how their financial activity may impact their rating.

Below are a few of the main ways that getting a debt consolidation loan could positively or negatively impact your credit score.

Requires hard credit checks

Negative. Your credit score will usually drop by a few points when a lender reviews your credit report, something called a hard credit inquiry, hard credit check, or hard credit pull. Having too many new hard inquiries in a short time can potentially lower your score.

However, applying for new loans and credit lines is sometimes unavoidable. Though you may see an initial decline, it generally goes back up over time with responsible credit use.

Lowers average account age

Negative. The average age of the open accounts on your credit report counts for 15 percent of your FICO^® Score. When a new line of credit gets added, this lowers the average age of your accounts and causes your score to take a small hit.

One way to minimize the impact of opening a debt consolidation loan is by not closing your existing accounts after you pay them off. Leave your accounts idle or use them for occasional small purchases that you pay off right away so you can use their age to your benefit. However, if you pay a high annual fee for the account or have a problem with overspending, it may ultimately be better to close it anyway.

Decreases credit utilization ratio

Positive. Your credit utilization ratio is the percentage of available revolving credit you're using at a given time. Revolving credit is credit you use as needed, like a credit card. Experts typically recommend keeping your balances below 30% of your credit limit. Using a debt consolidation loan to pay down big credit card balances will increase your available revolving credit and lower the ratio, as long as you keep your old credit cards open and keep their balances as low as possible.

Boosts payment history

Positive. Having a positive payment history is always important. Ideally, you're getting a debt consolidation loan because you want your monthly payments to be smaller and more manageable. This is a great opportunity to start with a clean slate and ensure you make your payments on time, every time.

The bottom line

A consolidation loan can affect your credit in different ways, depending on your individual situation and how you manage your finances. Although your credit score may go down a bit when you open a new account, you may also benefit from a lower credit utilization ratio and positive payment history. And you'll also be able to manage your debt with smaller, more predictable payments, which may improve your financial standing in the long run.

CONTACT:

Sonakshi Murze
Manager
[email protected]

SOURCE: OneMain Financial

View the original press release on ACCESS Newswire

J.Gomez--AT