A debt consolidation loan can help improve your credit score – potentially giving you access to better rates of interest and other financial products in the future.
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.
Fortunately, debt consolidation can help get your finances back on track and also benefit your credit score – providing you make the monthly payments.
Instead of helping your credit score, a debt consolidation loan may initially harm it. This is because you’re starting a new account which can lower your overall rating. However, once you start using the loan to pay off your debts, several events can happen which should ultimately benefit your score:
Paying off your creditors. Using the funds to pay off multiple organisations, while closing accounts in the process, demonstrates that 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 that you’re responsible with money.
These 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.
Depending on your circumstances, debt consolidation could be the right option for you – or an alternate solution could be preferable. To find out more information, get in touch through our contact form.
Otherwise, feel free to complete our quick application below and we’ll help find you a loan with the best rates possible.