Credit scores are some of the most important numbers attached to your financial status. Having a good credit score can help you get a good interest rate when you borrow money. Good scores can also get you better insurance premiums and better deals when you’re signing up with a new cell phone company or upgrading your cable package. FICO scores range from 300 to 850, and anything below 580 is considered fair or poor. Needless to say, fair or poor scores can cost you a lot.
When you’re considering a debt consolidation loan, you should understand whether it will hurt or help your quest to improve your credit score. Let’s take a look at the facts.
Impact From Loan Application
When you apply for a loan or credit of any kind, you are allowing lenders to make what is known as an “inquiry” of your credit report from a credit bureau. When you check your credit report, you may find a list of these companies. Overall, these inquiries will very minimally impact your score — maybe by five points. This is because credit bureaus recognize that applying for lots of credit at once is considered a risky financial move. With loans, though, it’s different. It can be a smart move to shop around before you decide on a loan. If you find a loan within 15 to 45 days, those inquiries will not impact your score.
Making On-Time Payments
If you use your debt consolidation loan to pay off the high-interest credit cards that you’ve maxed out and are falling behind on, your credit score could be on the rise. To ensure this, cut up your credit cards once you’ve paid them off and wait to apply for new credit until after you’ve completed your debt consolidation loan payments. If you have a plan to stop running up debt and make your loan payments each month as agreed upon in the terms of the loan, with time your credit score will improve.
Making Late Payments
On the other hand, it does not look good if you start falling behind on your debt consolidation loan payments. Late payments will be reported to the credit bureau and will show up on your credit report and drop your score. As you start to rebuild your credit with a loan, you don’t want to undo the progress you’ve made. These loans take time, energy and resources to receive, so be sure you are able to make the payments on time before signing up for this kind of debt relief process.
What If You Don’t Consolidate?
The more of your overall credit you’ve used — that is, if you have high balances on your credit cards — the more likely your credit score will drop. Even if you are making the minimum payments, your score will continue to go down with every new purchase you make with credit. Keeping your balances within 30 percent of your overall credit will keep your score safe. Still, over time, if you have mounting debt and refuse to do anything about it, your financial health will continue to suffer. It’s better to make a plan and start working to improving your credit score today.
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