Before deciding if debt consolidation is the right move for you, it is important to know how it will affect your credit score. We share the short term and long term effects of debt consolidation.
1. New Credit Applications
When you apply for that personal loan or balance transfer credit card, the lender will perform a hard inquiry on your credit, which may lower your credit scores by a few points.
2. New Credit Account
Opening a new credit account, such as a credit card or personal loan, may temporarily lower your credit scores. Lenders look at new credit as a new risk, so your credit scores may take an additional hit when taking out a new loan.
3. Lower Credit Utilization Ratio
The credit utilization ratio is a measure of how much available credit you’re using. Once a debt consolidation account is opened, this could drop and increase your available credit, which could improve your credit score.
4. Improved Payment History
If you are diligent at making payments on time, you may see your credit scores increase over time. Your payment history is a huge factor in determining your credit scores.
Consolidating your debt into a new, lower-interest loan may hurt your credit scores in the short term. However, if you make regular, on-time payments and pay off your debt consolidation loan in a reasonable amount of time, your credit scores should recover and may even improve in the long term as long you get rid of debt faster and establish a solid payment history.
Do you need help with your debt? Let us know!
As we begin the New Year, it’s a great time to work on lowering your monthly payments. We offer ways to consolidate your debt into one monthly payment. Please give us a call at 800-835-3400 to speak with one of our Member Advisors, or visit us online at caminofcu.org for more information.