Having multiple credit cards and loans with different balances and due dates can become overwhelming. If you’ve been thinking about consolidating your debt, you might wonder how the decision may impact your credit. Any new loan could impact your credit score, but whether it is right for you—for the short and long term—depends on your personal financial situation. Explore debt consolidation thoroughly before you make your decision.
What Is Debt Consolidation?
Debt consolidation is when you take out a new loan to pay off balances from older loans. The new loan helps turn your many loans and payments into a single loan with one monthly payment and a fixed or variable interest rate. If you find it difficult to keep track of several monthly bills and don’t want to risk making a late payment, you might consider debt consolidation. Additionally, if the interest rates you currently pay are high, you may be able to obtain a lower interest rate with a debt consolidation loan.
Debt Consolidation Factors to Consider That May Impact Your Credit Score:
1) Credit Check
When you apply for a new loan, the lender performs a “hard” credit inquiry by requesting your credit report and score. Hard inquiries may impact your credit score. These hard inquiries tell lenders that you are looking for new credit and can stay on your credit report for two years, but generally only affect your credit score for one year.
2) Average Age of All Your Accounts
One of the factors underlying your credit score is how long you have had the accounts that appear in your credit report. The credit bureaus look at the average age of your accounts, when you last opened a new account, and the age of your oldest account. In general, the older your credit history, the better it will be for your credit score.
When you take on additional credit accounts, such as a debt consolidation loan, the average age of all your accounts lowers, which may negatively affect your credit. However, your average credit account age will increase over time, and this portion of your credit report only represents about 15% of your total credit score.
3) Credit Utilization
The credit bureaus look for a utilization rate under 30%. So, if you can pay off revolving lines of credit like credit cards with a debt consolidation loan, you reduce the credit utilization rate in your credit report and raise your score over time. For example, if your credit limit on a card is $10,000 and you’ve used $9,000 of that, your credit utilization rate is 90%.
4) On Time Payments
On time payments are one of the most important factors in your credit report, responsible for about 35% of your score. If you have a variety of bills to pay each month, it may be hard to keep track of your monthly payments and make them on time. If a single consolidated loan payment helps you pay your bill on time, you can work to improve your on-time payments and build better credit.
5) Cash Flow
Your debt consolidation loan may provide you with better terms and a lower monthly payment than the combined monthly payments of all your other loans. In this case, you may improve your overall cashflow, but it’s important to make sure you budget for the single larger payment. Any time you apply for a new loan, you want to examine your finances and spending habits to determine what will work for you.
Still not sure about debt consolidation? Speak to a financial professional or check online nonprofit resources like credit.org, an organization dedicated to educating consumers about finances and debt relief.
If and when you decide on a debt consolidation loan, talk with a representative from Mariner Finance, LLC. We are dedicated to providing you the best customer service possible.