Adobestock 516908080

Five Ways Debt Consolidation Can Impact Your Credit

3.9.2023 | Category: Article

Debt consolidation is the process of combining multiple debts into a single loan or credit card account. This can simplify payments and potentially lower interest rates, making it easier to manage and pay off debt.

According to the credit reporting bureau TransUnion, 22 million consumers had an unsecured personal loan, the highest number on record as of Q3 2022. One of the most common uses of these unsecured loans was to consolidate high-interest debt such as credit cards, student loans, and medical debt. 

While debt consolidation can provide many benefits, it's important to consider its potential impact on your credit score. Here are five ways debt consolidation can impact your credit:

A hard inquiry may temporarily lower your credit score.

When you apply for a debt consolidation loan, the activity will be reported as a hard inquiry on your credit report, which can temporarily lower your credit score by a few points. However, this dip is typically small and temporary, and your score will likely recover within a few months, assuming you continue to make payments on time.

It can reduce your credit utilization ratio.

Your credit utilization ratio is the amount of credit you're currently using compared to your available credit limit. If you have high balances on multiple credit cards, consolidating them into a single loan can significantly reduce your credit utilization ratio, which can positively impact your credit score.

It can simplify your payment history.

One of the factors that contribute to your credit score is your payment history. Consolidating your debts into a single loan can simplify your payment history, making it easier to keep track of your payments and avoid late or missed payments, which can negatively impact your credit score.

It can impact your credit mix.

Another factor that contributes to your credit score is your credit mix, which is the variety of credit accounts you have. Having a healthy mix of different types of credit, such as credit cards, loans, and mortgages, can make a positive impact on your credit score. 

However, when you consolidate your debts, you move all of your debts into a single loan or credit card account. This can potentially lower the diversity of your credit accounts, which can have a negative impact on your credit score.

If debt consolidation is a tool you’re considering, it’s important to know how to improve your credit score once you’ve completed the process. Here are five effective ways to improve your credit after debt consolidation:

Make on-time payments

The most important factor that influences your credit score is your payment history. To improve your credit score, it's essential to make your payments on time. Set up automatic payments to avoid missing any payments and maintain a clean payment record.

Pay off your remaining debt

After consolidating your debt, it's important to pay off any remaining debt as soon as possible. This will not only help you save on interest charges but also improve your credit utilization ratio, which is the amount of credit you're using compared to the amount of credit you have available.

Keep credit card balances low

Another crucial factor that affects your credit score is your credit utilization ratio. By keeping your credit card balances low and paying them off in full each month, you can keep your credit utilization ratio low and improve your credit score.

Monitor your credit report

Regularly monitoring your credit report can help you identify any errors or inaccuracies that could be negatively impacting your credit score. Dispute any errors you find with the credit bureaus to get them corrected and improve your credit score.

Build a positive credit history

Building a positive credit history is important for improving your credit score in the long run. Consider applying for a secured credit card or a credit-builder loan to establish a positive payment history and increase your creditworthiness.

Improving your credit score after consolidating debt requires discipline, patience, and a proactive approach. By being proactive and diligent, you can successfully rebuild your credit and achieve financial stability.

Why choose Mutual of Omaha Mortgage for your home loans?

The confidence of a name trusted by millions of customers over 100 years

Personalized service through the loan process forms an experienced mortgage expert

Manage the entire loan process from anywhere with our easy-to-use mobile app