Is debt consolidation good or bad for my credit score?
Is debt consolidation good or bad for my credit score?
Debt consolidation could be good or bad for your credit score. It could help you pay off debts quicker, and help you demonstrate good repayment habits, both of which could improve your credit score. However, defaulting on the loan could negatively affect your credit score.
The benefit of consolidating your debt is replacing many monthly repayments with one. This could make it easier to pay on time and show good repayment history – which could then positively affect your credit score.
Interest rates on debt consolidation loans may be lower than other types of credit – e.g. credit cards. So because a higher percentage of your monthly payment goes towards the loan principal, you could get out of debt faster.
- Debt consolidation can help you manage your borrowing
- You could pay off debts sooner, and pay less interest
- Making payments on time could help improve your credit score
- Missing payments could adversely affect your credit score
- This could help you get out of debt faster
If you already have bad credit, it could be difficult getting approved for certain types of debt consolidation loan.
If that’s the case, a secure loan could be suitable. With this type of loan, the risk to lenders is reduced as a house or other asset acts as security on the loan. That could improve your chances of getting approved for a debt consolidation loan.
Bear in mind if you default on the loan, your credit score may be negatively affected.
Think carefully before securing debts against your home your home may be repossessed if you do not keep up repayments on your mortgage or any other loan secured against it. If you are thinking of consolidating existing borrowing, you should be aware that you may be extending the terms of the debt and increasing the total amount you repay.
