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Debt Consolidation And How It Affects Your Credit

10 December 2018 No Comment

Repaying multiple debts can at times get overwhelming, with different payments to make on different due dates and varying minimum balances. The slightest mistake could cost you a fortune in penalties and late payment fines, and of course, take a toll on your credit score.

Debt consolidation offers a practical solution out of the resulting financial mess. It essentially involves taking out a single umbrella loan to pay off smaller loans. Consequently, it allows you to focus on making a single monthly repayment instead of multiple smaller ones. However, besides simplifying debt management, debt consolidation can also have a positive impact on your credit score.

Possible Benefits of Debt Consolidation on Your Credit

 

1. Better Payment Plan

With debt consolidation, instead of having to juggle several payments every month, you only make and keep track of a single payment. Consequently, it reduces the chances of making late payments or missing them altogether. In turn, this repayment consistency serves to improve your credit score.

2. Diversified Credit File

Having different types of credit contributes significantly to your credit score. Most people have only one type of credit, such as revolving credit in the form of credit cards. But when you take out a consolidated loan, it diversifies your account, introducing a new type of loan – an installment loan – to the mix. When you make timely payments on this loan, it proves that you are capable of handling multiple types of credit successfully.

3. Fixed Repayment Term and Rate

Falling behind on debt repayment could happen due to fluctuating rates and changing terms on your multiple debts. As a result, you might find yourself falling slightly short of the required amount when a debt is due for payment.

But with debt consolidation, you get a fixed repayment term and a constant rate. This makes it easier to plan ahead knowing the exact amount you need to pay every month and when you expect to clear the loan. Working with such clear information makes it possible to budget for repayments, reducing the risk of missing a payment.

4. Faster Loan Repayment

If you are able to get a consolidated loan at a lower rate than existing loans, you can plan to pay it off faster. Paying off high-interest loans with a lower-interest one saves you money as well, and can make it easier to manage smaller monthly payments.

Notably, the faster you reduce the loan balance, the lower your credit utilization ratio falls. This is the ratio of the credit you actually use compared to your total credit limit, a figure that accounts for 30% of a credit score.

A Need for Caution

It is clear that consolidating debts can have a beneficial impact on credit. However, the effect could be reversed if your choice of debt consolidation loan fails to reduce your cost of debt. Evolve offers a wide array of consolidation options to suit the needs of different loan applicants. Choose carefully to ensure it does not create more problems than the ones it solves.

How well this type of loan serves you will also depend on your financial management habits. By keeping poor financial habits in check, it will be possible to maintain a healthy credit score for the long-term.

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