Do Debt Consolidation Loans Help Your Credit?A consolidation loan can be one way to reclaim control of your finances - and it can be good for your credit score as well - learn how here.
If struggling with money, you’re probably only thinking about the ‘now’. With creditors potentially chasing you for funds you don’t have, who can blame you? Fortunately, there are solutions available which can help you get on top of your finances quickly – but not all are good for your credit score.
This rating dictates how easy it will be for you to obtain financial products now and in the future. Although you may not be thinking about this just yet, it’s good to keep your credit score in as favourable a position as possible.
A consolidation loan is probably one of the best ways to get control of your finances while having minimal effect on your credit rating. Read on to find out more information.Get My Loan
What affect does debt consolidation have on your credit score?
If you get approved for a consolidation loan, your credit rating will probably initially worsen. This is because you’re taking out another account which will impact your credit utilisation ratio. This figure represents how much available credit you have.
For example, if you have a credit limit of £20,000, and if you had £10,000 worth of loans, your credit utilisation ratio would be 50%. Generally though, it’s recommended to keep this figure around 30%.
After this occurs though, your credit rating should slowly start improving. This is because:
- You’re closing accounts with existing creditors;
- You start slowly decreasing your credit utilisation ratio;
- You make regular repayments on time;
Debt consolidation could hurt your credit rating if you miss payments on the loan. Alternatively, if you make multiple applications for loans, this could also have a negative effect on your score.
You can read more about this on ‘How does debt consolidation affect credit scores’.
Is debt consolidation best for my credit score?
Of all debt solutions available, a consolidation loan is probably one of the best ways to regain control of your finances while having the least impact on your credit score. Here’s how it compares to some other options out there:
An IVA (standing for individual voluntary arrangement) is a form of insolvency which can write off large amounts of what you owe. However, details of this agreement will remain on your credit report for six years from when the IVA is first agreed.
During this time (and for some time after the IVA is approved) your credit rating will make it difficult for you to obtain other financial products.
Bankruptcy is often considered by many as a ‘fresh start’ for your finances – but it isn’t without cost. Similar to an IVA, bankruptcy will remain on your credit report for six years after the point it was declared. However, your credit rating may be adversely affected for long after that.
Debt Management Plan
A Debt Management Plan is an informal arrangement with your creditors to repay what you can until the debt is resolved. However, because you’re paying less than the agreed amount, this solution will likely have a detrimental effect on your credit rating.
Do debt consolidation loans help your credit?
Ultimately, whether debt consolidation loans help your credit score is dependent on you. If you keep up with the repayments, there’s no reason why this shouldn’t ultimately be the case. Compared with many other options out there as well, it will likely be more favourable for your score than other debt solutions.
As we’re a consolidation loan broker, it makes sense for us to find the best deal possible for you. As a result, we won’t recommend debt consolidation if you couldn’t afford the repayments. To find out if you qualify for this solution, click the button below:Can I Consolidate My Debts?
APRs from 5.8% to 89.9%
We are a broker, not a lender.
Unsecured Loan Representative 69.9% APR
Borrowing £7,500 over 36 months, repaying £502 per month, total repayable £18,083. Total cost of credit £10,583. Interest rate 69.9% (variable). The lenders on our panel offer loans for 12-60 months, with rates from 5.8% APR to 89.9% APR. The Representative Example is based on all loans paid out by lenders between 19th Apr 2022 and 23rd Dec 2022.
Secured Representative 11.7% APR
If you choose to add fees to the loan: Assumed borrowing of £25,000 over 120 months, plus a broker fee of £2,500 and a lender fee of £250 would result in monthly repayments of £345.55, the borrowing rate is 8.6% (variable), the APRC is 11.7% (variable), total charge for credit £16,466.00 and the total amount payable £41,466.00. You can opt to pay the lender and/or broker fees upfront, your adviser will discuss these options with you.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any debt secured on it. All rates vary subject to loan amount, loan type and status. Repaying your debt over a longer period of time may increase the amount you pay.