Does Debt Consolidation Really Hurt Your Credit?
When you’re thinking about consolidating the money you owe, one question nags you until you find the answer. And that question is…
Does debt consolidation hurt your credit or not? Will your credit take a beating? And is it even worth it to explore consolidation at all?
This article answers those questions and more.
Not only will you learn what consolidating does to your credit, you’ll learn the smart way to go about managing everything.
The first step in knowing how your credit score gets affected comes down to understanding that different debt reduction programs will have a different influence on your score.
And that’s where we start with this blog post.
What Affect Does Debt Consolidation Have on Credit?
Many consumers worry that going with debt consolidation will affect their credit negatively and reduce their credit score. If you have high levels of credit card debt, your credit rating may have already taken a hit, and the last thing you want to do is damage your credit further.
The impact debt consolidation will have on your credit depends on a number of factors, including the type of consolidation program you choose, the amount you have to borrow and your success in paying it off on time.
For example, if you go with a balance transfer credit card to consolidate your debt, you are essentially applying for another credit card.
The credit card application requires a hard inquiry on your credit report, which does cause your score to decline a little bit.
Keep in mind that your credit score is affected by your credit utilization ratio; that is the amount of credit you have outstanding compared to your balances. If your credit cards are all maxed out or carrying high balances, that fact will be reflected in a lower score.
In that case, opening a new credit card to consolidate debt could reduce your utilization ratio and actually improve your score.
Your score could improve even more as you pay down your balances and reduce the amount of credit you have outstanding. So in this instance, debt consolidation does not hurt your credit and can, in fact, help you.
How a New Loan Impacts Your Credit
Your credit utilization ratio could also be reduced if you use a personal loan to consolidate your debt. The reduction in the utilization ratio will in turn increase your credit score and make you look better to potential lenders.
Your credit score will take a hit, however, if you pile new debt onto your now balance-free credit cards. Your credit score will suffer even more if you miss a payment or pay late.
Payment history plays a major role in determining your credit score, and even a single missed payment could be devastating to your credit profile.
That is not the fault of the debt consolidation process; it is merely a fact of life. In order for a debt consolidation loan to do its magic, you need to put in the hard work and make sure you do not max out your credit cards a second time. As you can see, different options can impact your credit differently.
So the answer to “will debt consolidation hurt my credit score” all comes down to the program you decide to go with.
Get a Better Handle on Your Credit
It is important to note that simply utilizing debt consolidation will not solve the underlying problem. If your credit cards are maxed out and your payments are out of control, you need to assess the situation carefully to ensure the problem does not repeat itself.
If you do not take control of your spending and limit your credit card usage, debt consolidation could actually make things worse. By freeing up credit on your plastic, you run the risk of maxing out the cards yet again.
That could leave you with few options and a much lower credit score.
Consolidating credit cards can be a good way to eliminate high interest debt and save money, but only when used properly.
If you are willing to put in the hard work and cut up your credit cards, consolidation can be a godsend.
If not, it will just be a band aid on a gaping wound.