Impact of Debt Consolidation on Your Credit Score
Debt consolidation can have an impact on your credit score. If you didn’t know this before, you’ll be happy to find out that consolidating debt mostly reflects positively on your credit score.
If you are in financial trouble and are not able to keep up with your monthly payments towards debts, then debt consolidation may help you with effective resolution of your problems. Besides reducing your consolidated monthly payments towards debt, it will help you avoid continual onslaught on your credit score because of multiple late payments or defaults on more than one loan or credit card accounts.
There are many ways in which debt consolidation can affect your credit score positively. If you have multiple accounts with unpaid debts, then you would be considered a high risk borrower as compared to someone having a single consolidated debt. It is also simpler to manage only one monthly payment instead of multiple payments, which ensures that you rarely ever miss a payment by mistake. Missing a payment has a penalty on your credit score, and can be avoided by managing your debt repayments better.
There can also be a short term negative impact of debt consolidation on your credit if you close several lines of credit at once. Closing these lines increases your credit utilization ratio, which in turn causes a small drop in credit score. To avoid this, you should just pay off the debts without closing too many credit cards or other credit lines available to you. This will keep your credit utilization ratio at around the same level as before and not affect the credit score adversely.
