Increasing Credit Score Through Debt Consolidation

Your credit score is incredibly important when it comes to navigating your personal finance. It determines everything from the loans that you can get to the rates that you’ll be paying on these loans. A good credit score means that you’ll have more favorable terms that gives you more flexibility, which, in turn, will end up making life infinitely more convenient.

Now, it’s important to note that this works both ways. This means that having a bad credit score will make things more difficult for you. For this reason, people are always on the lookout for ways to increase their credit score. Among the many ways to do this, debt consolidation is one of the most effective.

But what is debt consolidation and how can it affect your credit score? If you want to know the answer to this question, along with other questions regarding debt consolidation, then we’ve got just the thing for you. Read on for an in-depth discussion on debt consolidation and how it can increase your credit score.

What Factors Affect Credit Score?

To contextualize everything, it’s important that we review the different factors that affect your credit score. Now, this is a tricky thing to discuss as there are a multitude of things that actually affect credit score. To help simplify things, we’ve summed it up to the three most important ones.

Payment History

As we’ve previously mentioned, payment history is one of the most important factors when it comes to your credit score. By ensuring that you make the necessary payments on time, you put yourself in the best position to have a good credit score. On the flip side, being careless with your payments and paying late will have a negative impact on your overall credit score.

The reason why payment history is so important is because lenders want to be sure that they’ll get their money back. Paying on time indicates that you are responsible with your payments, meaning there is less risk when it comes to loaning you money.

Credit Usage

Credit usage is also another important factor that plays into your credit score. Now, usage isn’t really the correct term as it’s really your credit utilization ratio that determines your credit score. So what is the credit utilization ratio? Basically, it’s the ratio between your revolving credit to the total revolving credit limits.

While it may differ on a case-to-case basis, lenders tend to avoid individuals who use more than 30% of their available credit. If you tend to max your credit out a lot, this could potentially reflect negatively on your credit score.

Credit History Length

Lastly, the amount of time that you’ve held your credit accounts also plays into your credit score. Generally speaking, the longer you’ve had a credit account then the higher your score will be.

It doesn’t matter if you’ve been paying your debt on time if you’ve only been doing so for a short period of time.Now, there’s no way around this. Just be sure to be consistent with your payments and you should see your credit score go up as more time passes.

What Is Debt Consolidation?

Debt consolidation refers to the act of taking out a new loan in order to pay off other debts that you currently have. And while it may seem counterintuitive to borrow money in order to pay off your debt, it can actually be a pretty sound financial decision when used correctly.

This is because it allows you to combine multiple debts, all with different interest rates, into a single larger debt. What’s great about these types of loans is that they usually have lower interest rates or lower monthly payments. Consolidating all of your debt into one debt gives you a little more wiggle room when it comes to your personal finances.

Given how useful it can be, it’s not surprising that people often make use of it to pay off different types of debt. Whether it be student loan debt or credit card debt, debt consolidation can help people get out of tricky financial situations. Remember, the last thing you want is to be locked into debt with unfavorable terms as this will result in long-term losses.

How Can Debt Consolidation Increase Credit Score?

Now, it would be incorrect to say that getting a debt consolidation loan alone will improve your credit score. This is because you’ll still have to take the other factors that affect credit score into consideration. The correct way to put things would be that debt consolidation offers you the best opportunity to improve your credit score.

The funds that you loaned won’t mean much if you still don’t pay your new debt on time. This shouldn’t be too difficult assuming that the terms on these new loans are considerably more favorable for you.

Now, there are also immediate benefits that come with taking out a debt consolidation loan. Since your lenders will automatically pay all your previous debt, this will effectively reduce your credit utilization ratio. A lower credit utilization ratio will help boost your current credit score.

Lastly, it’s important to note that debt consolidation can also end up lowering your credit score. This is because merely applying for the loan leads to a hard credit inquiry. Hard credit inquiries or hard pulls occur whenever you apply for a new line of credit or a new loan. Basically, this means that creditors have requested to look at your credit file to determine risk.

How Do You Get A Debt Consolidation Loan?

You can get a debt consolidation loan from the usual places you can get loans. This includes but is not limited to banks, credit unions, and even online lenders. It would be in your best interest to look up their terms before committing to them to make sure that you’re getting the most favorable terms possible.

Now, it’s important that you understand that debt consolidation doesn’t eliminate debt. A better way to look at it would be a restructuring of your already existing debt. While the terms will be different, and hopefully more favorable, you’ll still need eventually to pay back the amount that you owe in full.

There are also certain preparations that you’ll need to make before consolidating your debt. Be sure to do these things to make sure that this entire process goes smoothly:

1. Identify the Debt: Before applying for a loan, you have to make sure that the debts that you’ll be consolidating qualify for this type of loan. Secured debts like mortgages, auto loans, and boat loans aren’t usually covered by debt consolidation.

2. Order Your Credit Report: To make sure that you aren’t forgetting any debt that you still owe, it would be helpful to order your credit report. What’s great about this is that it’s free and will help you better plan for debt consolidation.

3. Assess Your Budget: We already talked about making sure that you get favorable terms. Now, what’s favorable for one person may be unfavorable for another. Sometimes it’s worth taking on higher monthly payments with lower interest. This is why you’ll want to assess your budget to see how much you can allocate to monthly payments.

4. Check Your Credit Score: You’ll also want to check your current credit score. This will give you an idea of the type of loans that you’ll have access to. By knowing where you stand based on your credit score, you’ll be able to figure out if a lender is giving you the best terms possible or if the terms can be better.

Lastly, you’ll want to consider a few things before pushing through with debt consolidation. Remember, aside from improving your credit score, this also has to benefit you from a financial standpoint. To help simplify things, ask yourself these questions:

1. Will debt consolidation lower my payments?

2. Will I get lower interest rates?

If the answer to any of those two questions is yes, then it’s definitely worth looking into debt consolidation companies.

Hopefully, the information listed above proves to be useful when it comes to helping you increase your credit score. When used in the right situation, debt consolidation can be an incredibly effective way of increasing your credit score. However, you’ll want to be sure that you’re getting good terms when consolidating your debts.

The last thing you’ll want to do is to resolve your debts only to be locked into more unfavorable terms.  The key here is to be thorough when weighing all the different factors to ensure that you’re getting the best deal possible. If you’re ever feeling unsure about debt consolidation, feel free to look back on this article as it may help clear things up.

We hope this discussion on credit scores and debt consolidation proves to be useful when it comes to helping you navigate your personal finances. Now, if you have any more specific questions, be sure to leave a comment below!