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How The Best Credit Consolidation Services Affect Your Credit Score

iCrowdNewswire   Jan 27, 2021  4:32 AM ET

Consolidating your obligations into a single monthly payment has its advantages, including simplifying your finances. But how does it impact your credit? Let’s take a look at how the best credit consolidation services can affect your credit score.

What Is Debt Consolidation?

Debt consolidation involves rolling multiple debts into a single affordable payment at an interest rate that should be lower than the average rate on your existing debts. When establishing your loan plan, it’s important to take a look at how much you owe and how much you can reasonably expect to pay each month, to be certain you can support this new loan.

What Kind Of Debt Can You Consolidate?

Only unsecured debt – debt not backed by collateral — can be consolidated. Examples of unsecured debt include credit card balances, certain types of student loans, medical bills, unsecured personal loans, payday loans, and cell phone and utility bills.

Consolidation And Your Credit

Before you consider debt consolidation in earnest, it’s important to understand how it might affect your credit and what steps you can take for optimal long-term results.

For one thing, nearly every time you apply for credit, the lender will run a hard check on your credit report. That usually shaves a few points off your credit score. If you’re shopping around for the best rates and applying for multiple loans, however, your hard inquiries usually will be rolled into one. Just be sure to apply to all prospective lenders between 14 and 45 days, depending on the scoring model.

Average Age Of Accounts

Also, when you open a new credit account – in this case it would be a consolidation loan – it lowers the average age of all your accounts. But if your credit history is solid overall and you have multiple aging accounts, your credit score may not suffer as much.

Credit Utilization Ratio

In addition, how you consolidate credit might affect your credit utilization ratio (CUR) – how much you currently owe divided by your credit limit. The higher your utilization rate, the more your credit will be affected. Keep in mind that your utilization rate comprises 30 percent of your FICO score.

Here’s an example of how credit utilization works: if you owe $5,000 on a credit card with a $10,000 limit, your credit utilization ratio for this card is 50 percent. To maintain a favorable credit score, the general rule of thumb has been to keep your CUR at 30 percent or under. Increasingly, however, experts are advising consumers who want an excellent credit score to not go over 10 percent.

Making Payments Will Improve Your Score

If consolidating your credit card debt makes you better able to make payments, your credit score could improve over time. How much it improves depends on what your payment history has looked like. The best credit consolidation services will explain how this works in detail to ensure your understanding of the process.

Continue To Monitor Credit

Your credit score in large part reflects how you manage credit. Sure, you’re trying to pay off the accounts you have now, but there’s every chance you may want to borrow again in the future. That’s why, once you’ve gotten your consolidated loan, it’s important to monitor your credit report and continue to look for ways to improve it. You also want to make certain that you’re current on factors that are impacting your credit score, and that your report is free of errors.

Now that you know how the best consolidation services affect your credit score, you can take steps to assure you’ll be in better shape to obtain affordable credit when you need it in the future.


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