What will a Debt Consolidation Loan Do to My Credit Score?

December 24, 2014

Luke-Notley small (Custom)Consolidating all your debts into one regular loan payment can make controlling your finances far simpler and more manageable. It can also have both positive and negative effects on your credit score, with lenders and creditors able to see the recent activity of your credit. Here we explain how debt consolidation can affect your credit score and what to consider before seeking this option.

What is a Debt Consolidation Loan?

A debt consolidation loan is a loan designed to pay off existing personal debts. If you are struggling to make the agreed regular repayments on multiple debts, a lender may agree to a debt consolidation loan with a lower regular repayment amount than your existing debts combined. This will allow you to meet the payments (over a longer period) within your financial constraints and pay off your debts in full.

Positive Effects

If you have numerous debts outstanding, these will already be present on your credit rating – potentially damaging your ability to secure credit. When seeking a debt consolidation loan, all the debts you will pay off with this loan will be cleared off from your credit score – imparting a positive impression upon any creditors or lenders reading your report.

The debt consolidation loan will become present on your credit rating though. Whilst this can be a negative inclusion, it may be preferential to the numerous debts which have been wiped out by the debt consolidation loan. If you continue to complete the payments as per the debt consolidation loan terms in full and on time, this may be reported for creditors and lenders to see on your credit rating.

Unfortunately, the positive effects of paying off numerous loans and debts via a debt consolidation loan may take time to appear on your credit score.

Negative Effects

Taking out additional loans and credit can be risky if you are already struggling to pay off existing debts. If you miss a payment or do not pay the full requisite amount, this will appear on your credit report, potentially damaging your rating. This makes it vitally important to ensure you agree debt consolidation loan repayment terms which you can afford in the short term and in the long term.

Additionally, closing credit card accounts after consolidating the loan can also affect negatively your credit score. If you wish to close a credit card account, it may be prudent to wait until your debt consolidation loan is completely paid off before doing so – otherwise your debt level will stay the same but your available credit will decrease. This will suggest to potential creditors and lenders that you have ‘maxed out’.

For any more information about how any form of debt management could help you, call the InControl team on 0800 072 6623 or visit our homepage.