How Does Debt Consolidation Affect Your Credit Score?

Credit Score

Credit ScoreWhen people owe money to others, the situation can be overwhelming. This is why many resort to ingenious modes of paying off their debts. According to Rapid Loans, one method is by consolidating multiple debts into a single loan, which makes managing multiple obligations much easier. Not a lot of people know, however, that debt consolidation is way more than a tool of simplification.

Debt consolidation, like other things, has profound effects on credit scores. The question is, are these effects negative or positive?

The Good

The most obvious advantage of debt consolidation is the one-track payment, which  eliminates the need to separately pay different creditors. What this means for your credit score is that the less balances you have, the better your credit score will be. With consolidation, you only deal with a single balance and not multiple ones spanning various creditors.

In addition, a consolidation loan presents something positive to credit agencies. To most, paying off several balances with such a loan makes it seem as if all accounts are paid off. This is because the loan appears as a single, new credit account, with accounts paid in full always on the positive side.

When it Comes to Credit Cards

The connection between consolidation loans, credit card debt, and good credit scores are fairly straightforward. With credit cards, the effects on scores depend on how you use a transfer. Using a big portion of credit on the card to consolidate multiple card balances may cause credit scores to drop. This is also possible if a new card is taken out and a good portion of its credit is used to consolidate as well.

Setting Things Straight

A number of people believe that debt consolidation hurts credit scores, but it is not true. They do so because one seems to “admit” that there’s a problem. In truth, it’s quite the opposite. As long as the new loan is being paid consistently and promptly, credit agencies acknowledge the effort and see that the debtor is taking the initiative.