Does consolidating debt hurt credit?

Debt consolidation sounds like an appealing option for those who have multiple loans and need to save on their payments every month. But, if not done correctly, it could really damage credit score...

Some cases of debt consolidation have been successful and even helped people to improve their credit score, but some other ones have really hurt theirs. This is a matter of combining different financial conditions that is particular for every customer. 

So, does consolidating debt always hurt credit? It should not hurt credit score at all, but sometimes bad planning or misunderstandings in the new loan details can impact negatively on it. To get a positive outcome of it and even improve your credit score, you have to make sure you are getting the best debt consolidation option for your needs.

How could it improve credit? 

Budgeting can become way easier when you consolidate debt. Plus, if you manage it correctly, it can improve your credit score, depending on the terms and conditions of your new loan. 

Regardlessly, designing a realistic payment plan for your new loan and sticking to it will improve your credit score. This means that making all your payments on time, according to agreement, is showing your financial responsibility and interest for getting rid of the debt. This is a determining indicator that shows institutions you deserve to start getting a higher credit score. This way, you might get your credit score increasing, when your debt is decreasing. Once your credit score hits zero, that is when your credit score is at its best.

What’s more, consolidating your debt might improve your payment history, because it is adapting better to your current financial situation. This improvement will make your credit score slowly rise, as long as you keep being responsible with the payments. 

Lastly, when you get a consolidation loan, it means that you are decreasing the number of loans you have to one. So that, eventually, you will have more credit available which could impact positively your credit score with time.

How could it affect credit?

As we have seen, debt consolidation is not as bad as people sometimes say it is. In some cases, it could even improve your credit. But there have been many cases that it has affected drastically credit score. These cases only occur when you don’t plan or manage your loan right.

The first moment it can affect your credit can happen even before consolidating. We are talking about the moment of application for the new debt. When you fill out multiple applications, each lender will report your intention of a hard inquiry, which might put slightly down your credit score, depending on the platform you use and the times you do it.

The next step of the process could also lower your credit a little bit, but this isn’t exclusive of debt consolidation. Any time you open a new credit account or take a new loan, your credit will go down a few points. This is because the lender is taking the risk of lending you the money. Though, it can be easily recovered or even equated by the reasons developed some paragraphs above.

But the strongest reason why your credit score will drop is when you do not pay your debt on time. This situation is like a snowball, once it starts, this problem will get start bigger and bigger. Not being able to pay on time might increase the rates you are supposed to cover monthly and accumulate more and more debt, and this will start affecting your credit score faster and faster.

The last reason evokes the borrowers lack of criteria before making financial decisions. Getting your debts consolidated can mean to get a great weight off in all your other credit cards. Having them available can be very tempting for some people, that start using them before paying the debt consolidation loan. We recommend avoiding the use of any other resources you have available to put yourself in more debt before you pay all or most of your debt consolidation, unless it is a real emergency.