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How does Debt Consolidation affect Credit Scores?

Does debt consolidation affect credit scores? We’ve covered some of the things you need to know about how debt and debt consolidation affects your credit score.
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Considering a debt consolidation loan to repay your creditors and get back in control of your finances? The good news is this option can be a great solution depending on your circumstances, However, it’s important to identify just how a consolidation loan will affect your credit score.

A debt consolidation loan can be a great option for those who want to consolidate multiple debts to creditors into one affordable monthly payment. To find out if debt consolidation could benefit you, click the button below to apply and we’ll discuss your circumstances with you:

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How much does debt consolidation affect your credit score?

Let’s start by looking at your current credit score. If you’re struggling every month to make payments to your lenders, then you may probably just be 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 may have a negative effect on your score.

It’s hard to think about the future if you’re struggling with the now. Yet, having a bad credit score may 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.

In this situation, debt consolidation could be a great way to get your finances back on track and also ultimately benefit your credit score. It also should be better for your credit than many other debt solutions out there.

Debt consolidation may help you to get your finances back on track. It may also indirectly benefit your credit score in the long term – this is because if you are able to get your finances under control and are no longer in debt to creditors, your credit score may start to improve in the long term.

Considering a debt consolidation loan to repay your creditors and get back in control of your finances? The good news is this option can be a great solution depending on your circumstances, However, it’s important to identify just how a consolidation loan will affect your credit score.

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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 use the loan to pay off your debts, several events can happen which may ultimately benefit your score:

01. You pay off 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.

02. 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%.

03. 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.

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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 could benefit you.

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 application form. Once that’s done, we’ll be able to identify if debt consolidation can help you – a step which may potentially help your credit score in the long-term.

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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.

Further reading

What are the Different Kinds of Unsecured Loans?

Understand what an unsecured loan is, and how best to use the different kinds of unsecured loans in 2023.

What are the Different Types of Secured Loans?

With so many different types of loans available, it can be difficult to know which is right for you. For more information on secured loans, read this expert article.

Persistent Debt – What Does it Mean for Your Credit?

Persistent debt can affect your credit rating for a significant time period. Read to find out more.