“Zindagi ek safar hai, jisme kabhi kabhi bojh badh jaata hai. Par ek waqt aata hai jab saari raastein ek hi manzil ki taraf jaane lagti hain—jaise karzon ko ek saath milakar, jeevan ka bojh halka kar dena.”
If you are struggling with multiple debts, loan consolidation can be the best solution for you. It makes your debt easier and cheaper. Debt consolidation isn’t a magic bullet. It can damage credit scores or bring even more damage if you are not wise with debt repayment. This blog post discusses how debt consolidation impacts credit scores. It also talks about how to get the most out of the debt consolidation.
How debt consolidation works
The debt consolidation ideology is simple. You take multiple unsecured debts and consolidate them into one with a lower interest rate. It is performed in two ways:
- a debt consolidation loan and
- a balance transfer card.
How debt consolidation can affect your credit
If performed accurately, debt consolidation possibly lowers the score temporarily. Every time you apply for a credit, the drop is visible because of the generated query appearing on the credit report. But, according to Experian, the decrease is normally less than 5 points, and your score should rebound within a few months.
Therefore, as the debt gets cleared, your credit improves. It is because the credit utilisation ratio is enhanced or how much of your available credit you’re using. The lower the credit utilisation ratio is, the better. Anything over 30% can damage your credit. Credit utilisation has a huge impact on your credit score. Therefore, making sure to keep it low should give your score a great boost.
Don’t become your own worst enemy
When you combine your debts into one, you’ll likely find it easier to manage your repayments. The interest rate of this new loan is generally lower than the rates on your original loans. This might tempt you to continue using credit cards now that debt seems less of a worry.
However, that would cause trouble if you were not careful. If you keep adding to your debt, it gets hard to stay on top of your payments again. Slipping and missing even a single payment can significantly damage your credit scores. In addition, late payments stay on credit reports for almost seven years. Because of failed payments, you would end up with even more debt and a reduced score.
Making debt consolidation work for you
Debt consolidation can be a good strategy, but it requires some discipline to work. Here’s how to avoid digging yourself deeper into debt during the consolidation process:
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| Avoid taking on new debt. |
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Conclusion
In a nutshell, debt consolidation can have a positive or a negative impact on credit scores. This depends on how you manage your loan consolidation. To begin with, query and increased debt reduce the chances of applying for debt consolidation. But, if managed appropriately, consolidating has numerous advantages. These benefits include simplifying payments, lowering credit utilisation, and helping you avoid missed payments.
Therefore, paying down debts consistently under one loan reflects positively on your credit history. On the other hand, failing to meet payments or accruing more debt after consolidation can further harm your score.