Debt consolidation loans can help your credit as long as you manage your debt responsibly. Any negative impact you see on your credit score will only be temporary. If you are considering a debt consolidation loan from Symple Lending or a similar company, it is important that you are aware of just how it can affect your credit to help you come up with the right steps.
Debt Consolidation and Your Credit Score
Debt consolidation consists of taking out a single loan to pay off multiple creditors. This can be done by taking out a personal loan or applying for a balance transfer credit card. Your credit score can be impacted in several different ways depending on the method you choose.
Is it possible for debt consolidation to lower your credit score
It is possible for a debt consolidation loan to hurt your credit score, sometimes just temporarily.
- Adding a new account- If you are opening up a new account to combine your debt, such as a personal loan or a balance transfer credit card, your new account will ultimately reduce the age of your accounts overall. This means that it can have a negative impact on your credit history. However, it will increase gradually, especially if you don’t open up any additional credit accounts.
- Increase in credit utilization- If your goal is to try and use a balance transfer credit card to combine your debt, you could run into potential issues if the new card doesn’t have a limit as high as the original one. The higher your credit percentage of the credit limit that you are using, the more damaging it will be to your credit. This may also negatively affect you if you enroll in a debt management plan. Fortunately, the good news is that as you pay down your balances, your credit utilization rate will also reduce.
- Credit inquiry- Whenever you apply for new credit, a creditor will pull your credit file which is listed as a hard inquiry on your credit report. Hard injuries can typically reduce your credit score by a few points temporarily. However, they are only used for 12 months by FICO and typically won’t damage your score by too much.
How will a Debt Consolidation Loan Increase Your Score?
While it is possible for a debt consolidation loan to damage your credit score on a temporary basis, it can also help you build your credit over time.
- Reduce credit utilization- If you plan on using a balance transfer credit card to transfer your debt and the card has a higher credit limit, you will lower your utilization rate. This will improve your credit score. The same applies if you were to use a loan to pay off your debt. As a result, your credit utilization rate will decrease.
- Make on-time payments- If you consistently make all of your payments on time, you will notice a positive impact on your credit score. Payment history plays a big part when it comes to factoring your FICO score. So, you should always prioritize making your payments on time.
If you are looking for further information, you can always talk to a Symple Lending expert.