The next thing you may want to know when researching for options on debt consolidation is how it will affect your credit score – positively or negatively. There are many forms of debt consolidation plans or programs that exist, but one thing that makes them almost similar with each other is that they have the concept of rolling all the debt from multiple creditors into a single debt, making repayments easier. And when handled correctly, the program can give you that financial freedom in time, relieving you from the stress of having to pay multiple debts at different times of the month. However, debt consolidation can affect your credit score.
What to know about debt consolidation loan
It’s a type of loan used in paying off other creditors. Take note that it is not a way of reducing debt, but it manages payments. It works by rolling your debt into one payment. Generally, this type of loan also has a lower interest rate than other types of loans.
The credit reporting agencies, on the other hand, are the ones that issue your credit score, which is based on your credit history.
The credit score is used by the lending institution in determining your credit line and loan risk. And without even saying, the debt consolidation loan can affect your overall credit standing.
How debt consolidation loan affects your credit score
In most cases, it can affect your score positively because the loan makes it appear that you have paid off your debt for the credit institutions. The loan is like a new credit account.
But in order to make that happen, you need to repay the loan consistently and on time.
Now if you’re using other credit accounts, take note that they also affect your credit score, so you should pay your bills on schedule for continued positive credit standing.
Is there benefit from a debt consolidation loan?
One of its most significant benefits is a single monthly payment. With it, you only need to pay once monthly instead of paying multiple credit accounts every month.
Such simplicity offered by this loan type makes it attractive for many people. It helps them get rid of debt issues, such as late fees.
In addition, the DCL also carries a lower interest rate than other debts, meaning you’re paying less using this type of loan as compared if you’d choose to settle the payments to multiple credit card accounts.
What’s the potential downside?
It is important that you stick with the payments of your debt consolidation loan, and avoid making late or missing payments to it; otherwise, your credit score will drop. So before considering a debt consolidation loan, you need to plan your resources in advance and make sure that you can stick with the monthly payment of a debt consolidation loan.
The debt consolidation isn’t detrimental to your credit score; in fact, it is one of the best strategies to address your financial struggles and pay off debts easier and faster. And if you’re paying the new loan consistently – on time, then credit agencies will be able to recognize that you’re responsible to resolve your debt issues.