How debt consolidation can improve your credit score
Sep 26, 2022
When you consolidate debt, you combine multiple debts and payments into a single debt with one monthly payment. Through debt consolidation, you’ll reduce the number of bills you have to manage each month and in turn, simplify the debt payoff process. You may also be able to save money with a lower interest rate and monthly payment. Consolidating debt might help your credit score as well.
Types of debt consolidation
There are a number of ways you can consolidate your debts, including:
- Debt consolidation loan: A debt consolidation loan lets you combine your debts into a single loan payment that may include a lower interest rate and fixed repayment schedule.
- Credit card balance transfer: With this strategy, you move multiple balances to a credit card through a balance transfer, ideally with a low APR during a promotional period.
- Home equity loan: If you own a home, you can use your home equity as collateral and receive a lump sum of cash to repay your debt.
- Home equity line of credit (HELOC): A HELOC is similar to a home equity loan but involves a revolving line of credit, allowing you to continue to withdraw money as you need to.
Ways debt consolidation might help your credit
By consolidating your debt, you can improve your credit in the following ways.
- Lower your credit utilization: Credit utilization refers to the amount of credit you’re using divided by the total amount of credit available to you. A low credit utilization ratio is generally good for your credit score. When you consolidate credit cards and lines of credit that are near their credit limit, you can reduce your credit utilization and temporarily boost your credit score.
- Diversify your credit: A debt consolidation loan adds a new type of loan to your credit mix. Since credit scoring models like to see you’re responsible with different types of credit, diversifying through debt consolidation can help your credit.
- Make timely payments: As long as you make on time payments every month and prove that you’re good at handling your money, your credit score will slowly but surely go up. There’s no quick fix here. A long, consistent history of on-time payments is the cornerstone of building your credit.
Should you consolidate debt?
If you’re overwhelmed with the debt payoff process, debt consolidation might be a good idea. When you consolidate your debt, you’ll no longer have to keep track of multiple debts and payment dates.
Also, debt consolidation might make sense if you’d like a lower interest rate that can potentially save you money over the life of your debt. In addition, consolidating your debt may be a great way to improve your credit and open the doors to lower rates and more favorable terms in the future. Keep in mind that you may not save in the long run if you take on new fees or extend your repayment term, even if your new loan has a lower interest rate.
If your goal is to boost your credit score, you may want to consider consolidating debt. Just make sure you choose the right debt consolidation strategy for your unique situation and commit to on-time payments. Best of luck!