Debt Consolidation: How it affects your credit score?

Published by Anuradha Chawla at July 14, 2023

What is Debt Consolidation?

Debt consolidation means taking a loan in order to pay off others, in the form of balance transfer credit cards or personal loans. Debt consolidation has different variations, and depending on your choice, here’s a few ways it can affect your credit score.

Pros of Debt Consolidation: How It Helps Your Credit Repair

Debt consolidation helps in avoiding credit damage during bankruptcy, among other pros. That’s why learning the art of managing debt while repairing credit is essential. Here’s how it can help with credit:

1. Reduce credit utilization

A smart way to learn how to consolidate debt while repairing credit is to transfer the debt from your credit cards to a balance transfer card that has a higher credit limit. This causes a dip in your utilization rate, thereby allowing for optimized credit repair after debt settlement.

You can also do the same trick to pay off debt using loans. Simply bring down your utilization rate to near zero on the specific card.

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2. Punctual payments

Working on paying your bills on time makes for a good payment history that greatly improves your credit. According to expert credit counseling for debt management, payment history is not only a deciding determinant in your FICO Score, but also helps to manage debt while repairing credit.

Consolidating your debt can bring you closer to financial freedom and help in avoiding credit damage during bankruptcy.

Cons of Debt Consolidation: How It Hurts Your Credit Repair

Here’s three ways that wrong credit counseling on debt management and debt consolidation actually hurt your credit repair:

1. Adding New Accounts

According to experts on debt settlement, opening a new account for consolidating your debt, like a personal loan or balance transfer credit card, is a terrible idea. The new account is actually lower than the average age of all your existing accounts. This is detrimental to your credit history thereby lowering your FICO score.

However, that average does increase eventually, but your should absolutely avoid new credit accounts unless truly needed.

2. Greater credit utilization

If your credit counseling for debt management has led you to balance transfer card usage for debt consolidation, make sure that the new card has a higher credit limit that the original for avoiding credit damage during bankruptcy.

The greater the percentage of your credit limit at the time of usage, the worse is your FICO score. It further impacts your choice to get on debt settlement and management plans by credit counseling agencies as credit counseling for debt management needs you to close those credit accounts.

However, if you keep paying your balances, your credit utilization level will soon get lower.

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3. Credit inquiries

Upon applying for credit, creditors often request to check your credit file, leading to hard inquiries that come up on your credit report. These can temporarily steal points off your FICO score, but are only considered for 12 months and not long-term detrimental.

Conclusion

Debt consolidation into new, lower-interest loans might temporarily hurt your credit score, however, if you keep up with on-time payments and pay off reasonable amounts on the loan at dues, your score will not only recover, but improve greatly and help you in establishing a sound payment history and avoiding credit damage during bankruptcy. Do you require expert credit counseling on debt management? Get in touch with Xander Financial.

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