Your credit score is key in helping you achieve your financial goals. Several factors determine your credit score, including how much debt you have, how long you've had the debt, and how timely you make your payments. It also reveals all your types and lines of credit, so it's one component lenders look at before approving you for credit. With a low credit score, you'll find it harder to secure loans, and when you do, they'll have higher interest rates and steep monthly payments.
Debt consolidation is a strategy that can help you improve your credit score and recover your good standing with lenders. Let's get into the details of the real impact of debt consolidation on your credit score and some of the methods you can leverage to consolidate debt.
What Is Debt Consolidation?
Debt consolidation means combining multiple high-interest loans, such as car payments, student loans, and credit card loans, into a single loan. You can use this method to streamline your debt repayment The new loan typically has a lower fixed interest rate and ensures you only have one monthly debt payment to worry about, making it easier for you to become debt free.
Using this debt management strategy may help improve your credit score in the long term by showing you've paid off your other outstanding debts and have only one loan you're servicing. However, because it involves taking out a new line of credit, there are consequences of consolidating debt. Opening a new loan could negatively impact your credit score in the short term because lenders perform a hard inquiry on your credit. The new line of credit and the lower average age of credit also temporarily dip your credit score. This starts improving soon as you start making payments and are consistent.
Should You Consolidate Debt?
Drowning in debt is a good enough reason to consolidate your debt. But, particular scenarios make consolidating debt an even better idea. Some of these include:
- Having high-interest credit card debt on multiple accounts
- Needing to save money on the interest you're paying on various lines of credit
- Simplifying your monthly debt payments
- Reducing your credit utilization rate
You can consolidate your debt for all or any of these reasons. Ultimately, this decision can help you improve your credit score, save some money on interest, and take you closer to achieving your financial goals.
Why Consolidate Debt?
Are you overwhelmed by the numerous credit cards you need to pay off every month, the car loan, and any other personal loans that all come with exorbitant interest rates? Then, debt consolidation is a good idea. Here are some debt consolidation benefits:
- Lower interest rates: The most appealing feature of debt consolidation is having a single "big" loan with a lower interest rate than the sum accrued by numerous debt accounts. This improves your chances of making timely debt payments, ultimately improving your credit score.
- Simplified debt repayment: Do you keep forgetting to make some payments because there are just too many to keep up with? Then pull it all into one monthly payment you'll never miss and protect your credit from missed and late payments.
- Lower credit utilization: A new debt consolidation account often means you have more available credit and counters some of the initial negative effects of taking out new consolidated credit, such as the hard inquiry and lower average age of credit.
How to Consolidate Debt
Certain types of loans are better for debt consolidation than others. Here are the top three options for you to consider:
1. A Personal Loan
A personal loan is the best loan to consolidate debt because it provides a structured debt management plan. You can take out a personal loan to pay off your other lines of credit, such as credit cards, car loans, student loans, utility bills, and medical bills, then remain with only the new loan.
Today, it's easier than ever to secure a personal loan right from the comfort of your coach, thanks to online lenders who approve your loan faster than traditional lenders despite your credit score. They only need you to prove your ability to pay back the loan without any collateral. They often offer lower minimum payments and low interest rates, and you can set up a custom repayment plan based on your needs and budget.
2. A Balance Transfer Card
Another popular debt consolidation method is applying for a balance transfer card, which is a promotional credit card with a 0% introductory APR for the first 12 to 18 months. If you fast-track your debt payments during the introductory period, you may be able to pay off your debt completely before the interest kicks in. However, these cards typically charge a higher 3% to 5% interest rate on the amount of credit you transfer at the end of the introductory period.
3. A Home Equity Line of Credit
If you own your home and have a built-up ownership stake, you can use this to consolidate your debts. A home equity loan uses your home as collateral to pay off all your other debts, leaving you with only one loan to worry about. Home equity loans normally have lower fixed interest rates than credit cards and personal loans and will work if you have a below-average credit score. Note that it could take you more than 10 years to pay off the interest and start paying toward your home's value. Even worse, this puts your home on the line, as you risk losing it if you cannot pay off the loan.
Decrease Your Debt With a Personal Loan From Atlas Credit
While debt consolidation could be your ticket to a debt-free life, the lowest-risk method is a personal loan. At Atlas Credit, we understand how hard it is to get a loan with a less-than-stellar credit score. So we make it easy and seamless for you with lower interest rates, lower minimum payments, and a custom repayment agreement that saves you sleepless nights.
We only need your word to approve your personal loan online, over the phone, or when you step into any of our branches. Our decision process is fast, and if you're approved, you can receive the loan on the same day you apply. Submit an online application for a personal loan to consolidate all your debt today and build good credit.