It is a fact that everyone wants to get rid of debt. It is because debt is costly and is preventing you from reaching your financial goals. Some people are out there who are considering credit card debt terrible while student loan or mortgage loan good. However, the fact is all kind of debts are equally bad because having debt means you are beholden financially to your creditor and you are unable to put your money in your pocket till you have any debt installment due on you.
Well, you will get multiple ways to get rid of your debt once you have to think about to eliminate that from your life and debt consolidation is one of the most common methods which is being used by various people out there.
How can debt consolidation affect my credit score?
Well, when you are going to consolidate your debt, then there are different ways which can affect your credit score. Here are some important things to know in this regard.
1. Debt consolidation can improve your payment history
Although it takes some time if you are going to stick to your payment plan then after some time you can experience improvement in your payment history. Undoubtedly, this is an essential factor in your credit scores.
2. Lower ratio of credit utilization
When you open a new credit account, then the ration of utilizing your balance will decrease. Resultantly, your available credit will start to grow.
3. Only one monthly payment
With debt consolidation, you will be able to get rid of multiple monthly payments with ease. By this, you only have to make a single payment every month, which is surely going to make it feasible for you to manage your finance effectively. Even more, it will also help you to diversify your credit file
But it is not all about good, here are some things which can hurt your credit card:
1. Lower Average credit age
When your credit account gets older, it develops some history with on-time payments, which will cause a rise in your score. However, opening a new account will decrease the average age of your account and will affect your scores negatively.
2. You may experience a minor hit on the credit score
When you are going to apply for a credit card loan, then the creditor will pull the credit report of your account to qualify you for your applied loan. This is known as a hard pull which will make an addition of inquiry to your credit report. This can cause a bit dip to your credit score. Even more, opening a new credit account will also lower your balance for a bit.
Debt Consolidation is an effective method which can help the borrower to lower his monthly payment and will help you to improve your credit score in a better way. But it will work if you will be stuck to the payment plan of your debt.