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In this article, we’ll get into each of them and explain how debt consolidation might cause your credit score to go up or down in each category.
1. Payment History
The category of “payment history” is where FICO keeps track of all your debt payments. On-time payments positively impact your credit score, while late and missed payments will lower your score. In addition, keep in mind that too many missed payments could lead to the lender resorting to collection action. You want to avoid that, so make your debt consolidation loan payments on time.
2. Amounts Owed
The total amount of debt that you owe is measured in two ways. The first is called the “debt-to-income ratio (DTI).” It consists of how much of your income goes toward paying your debts. The second is “debt usage.” That’s the percentage of available debt you are using. For example, maxing out a credit card means you’ve used 100% of your available debt on that card.
3. Length of Credit History
Some people think only the oldest account opened is relevant when calculating the length of credit history. That’s not entirely true. FICO looks at your oldest account to determine how long your credit history is, but it also looks at the average amount of time you’ve had each account. Any new account, like a debt consolidation loan, lowers that average.
4. Credit Mix
A healthy credit mix shows financial maturity. A good example of this is having a car loan, a mortgage, and a few credit cards. A personal loan for debt consolidation adds another element to the list. It’s not the most significant factor in lender decisions, so FICO only weights this variable at 10% of your overall score. That doesn’t mean it’s unimportant.
5. New Credit
Opening a new credit account will usually result in a slight drop in your credit score. That doesn’t last long, but it should be expected. Paying off balances with a personal loan, like a debt consolidation loan, and then making all the loan payments on time may offset it. But don’t expect overnight results. It’s also a good idea to avoid opening any other new accounts while you’re still paying off the new debt consolidation loan.
The Bottom Line
Debt consolidation may impact your credit score in a few ways, and how much it’s impacted depends on how you manage your loan. You may see a slight drop in your credit score when you first apply for a debt consolidation loan, which is normal. Over time, practicing healthy financial habits, like making on time payments and avoiding taking new debt, could help you boost your score. Debt consolidation isn’t a quick fix, but it’s a first step toward gaining control of your finances.
Notice: Information provided in this article is for information purposes only and does not necessarily reflect the views of thetradable.com or its employees. Please be sure to consult your financial advisor about your financial circumstances and options. This site may receive compensation from advertisers for links to third-party websites.
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