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How Does Debt Consolidation Affect Credit Scores?

A debt consolidation loan could help improve your credit score – potentially giving you access to better rates of interest and other financial products in the future.

What does your credit score currently look like?

If you’re struggling every month to make payments to your creditors, then you’re probably just focusing on making ends meet. Chances are, you might not even be thinking about your credit score. However, being in persistent debt or failing to make payments will have a negative effect.

It’s hard to think about the future when struggling with the now. Yet, having a bad credit score will make it challenging to get financial products. This means, should you choose to apply for a mortgage, loan, or any form of credit, your poor score will increase the chances of you being refused.

Fortunately, debt consolidation can help get your finances back on track and also ultimately benefit your credit score – here’s how it works.

How does debt consolidation affect credit scores?

It’s worth noting that, instead of helping your credit score, a debt consolidation loan may initially harm it. This is because you’re starting a new account. However, once you start using the loan to pay off your debts, several events can happen which should ultimately benefit your score:

You pay off your creditors and close accounts

Using the funds to pay off multiple lenders, you decrease the number of accounts in your name. Moreover, only having one creditor to repay makes the situation much easier to manage and demonstrates you’re on top of your debts.

Your credit utilisation ratio starts improving

Your credit utilisation is an indicator of how much available credit you have. For example, if you had just one credit card with a limit of £5,000, and if you used £3,500 of it, your ratio would be 70%. As your accounts close – and you start repaying your loan – your ratio will decrease. Generally, it’s recommended this figure is kept below 30%.

Your payment history improves

Making regular payments on-time towards one creditor is a great sign you’re responsible with money.

Debt consolidation and credit scores

The above factors are influential in determining your credit score. However, it’s important to note that it takes time to improve your rating. Eventually, by making payments on time and getting rid of your debt, you should be well on your way to improving your credit history.

A debt consolidation loan helps with this. By giving you the funds needed to close accounts with lenders, you focus on making one loan payment a month. This makes your financial situation much easier to manage.

As demonstrated, this solution can initially harm your credit score but improving your rating is a long-term goal. Fundamentally, in the future, once your score improves, you’ll be more likely to obtain financial products such as mortgages and loans.

For many people, this makes debt consolidation worth it.

Should I apply for debt consolidation?

Depending on your circumstances, debt consolidation could be the right option for you. To find out more information, get in touch and we’ll be able to help determine whether this solution or another would be best.

We can give you this answer at no financial obligation to you – so you really have nothing to lose.

Just click the button below and you’ll be taken to our short online application – it should only take about five minutes to complete. Once that’s done, we’ll be able to identify if debt consolidation can benefit you – and your credit score.

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