Do Consolidation Loans Hurt Your Credit Score? The Facts Explained…
Most people ask this question before embarking on a plan to fix their low credit scores. Is credit card consolidation a good idea? Let’s get into the details and find out the truth about consolidation loans…
Do Consolidation Loans Hurt Your Credit Score?
It’s short and sweet: No. The longer answer, however, is Yes, Possibly. And yes, this is all a bit confusing. In order to maximize the benefits of credit card consolidation, you need to first understand how it works (and how to make it work for you).
What Exactly Is A Credit Card Consolidation Loan?
Imagine that you have five credit cards, each with a balance you want to pay off. They all have different interest rates, and therefore, different monthly Perhaps you’re having trouble making your payments and feel a little overwhelmed. You may make mistakes and miss payments during this time since so many bills can cause you stress.
Through a consolidation loan, all your bills will be combined into one. With the new loan, you’ll pay off your existing credit card debt. Next, you will have to make back payments to the lender. It sounds easy, doesn’t it?
Ok, so what’s the catch?
There are risks associated with consolidation loans. The interest rate on your loan may be high due to your current credit score. Since you may have missed a few credit card payments, your credit may not look the best right now.
Owning your home can give you access to a lower interest rate. If you can’t also pay off the consolidation loan itself, you’re also at risk of losing ownership of your property. If you don’t close the credit card accounts you’ve now paid off, you may get caught up in the debt cycle again.
It doesn’t address the actual problem of financial mismanagement. If you’re not careful, you’ll bandage a hemorrhaging wound and add even more stress to your situation.
What’s the best way to get a credit card consolidation loan then?
Your priority should be to stop using credit cards! This is where we need to be honest. You cannot make the payments on the money you owe right now, so the problem won’t get better on its own. The longer you wait to get help, the more serious it will become. As time goes on, your credit scores will continue to decline, which could affect consolidation loans themselves. Put an end to using your credit cards immediately.
The next step is to explore your options for getting a consolidation loan with the best interest rate. There are many options to choose from, including…
- Taking a Personal Loan
- Home Equity Loans
- Retirement Account Loans
- Acquiring a Balance Transfer Credit Card
The best option is not just one with the lowest interest rate. Be sure to consider your repayment strategy, the risks involved, and what will ultimately work best for you.
Will Consolidation Loans Affect My Credit Score?
So now you’re understanding the importance of having your credit score in the best shape possible. This will help you qualify for the loan. It’s understandable you would want to estimate the risk of actually getting a loan. What would be the effect on your score?
When lenders (those you are applying to for a loan) examine your credit history, your credit score will take a small hit. This is called a hard inquiry, and it results in a few points being dropped. A word of advice, you should only interact with lenders when you’re sure that you’re ready to accept their loan.
Temporarily hurting your scores isn’t just a result of your applications. In addition, the new line of credit (loan) itself may affect them. Your account is relatively young (you have a new loan to repay) and new debt. These are all factors that will cause your credit score to dip.
How Can I Fix It?
If you keep up with your loan payments and do not exacerbate your debt problem, the lowered scores will be temporary. Paying off your consolidation loan improves your credit score over time.
In order to avoid falling back into the financial situation that led to your current situation, you have to stay on top of it. Establish a budget that you can stick to. Stop using your credit cards and make your payments on time.
