4 Reasons why a Debt Consolidation Loan will help Your Credit Score
A lot of people think of debt consolidation as a good way to improve their finances by getting out of debt. Not a lot of people realize that this financial tool can help you to improve your credit score as well. Here are some ways it might help yours.
- Better payment history. If you’re juggling dozens of bills every month, odds are that you forget to pay one or two. Besides getting slapped with a big fee, each of these late bills can knock a couple of points off of your credit score. With a debt consolidation loan, however, the number of bills you have to pay each month is dramatically reduced; you only have one loan to pay. That reduces the chance that you’ll forget an important bill, thereby improving your payment history and your credit score.
- You can pay your bills every month. Sometimes, you run out of money before you run out of bills. A missed payment can drop your score by 50 points or more. With a debt consolidation loan, however, you’ll have a fixed amount that you pay towards your debt every month, making it much easier to budget for your debt. You can also choose to pay less every month by lowering your interest rate and extending your loan payment term. That means you’ll always have enough money in the bank to make your debt payment.
- You’ll have fewer open accounts. After getting a debt consolidation loan, you’ll be able to close a lot of your credit card accounts. Since having a lot of open accounts is believed to lower your credit score, closing those accounts can help to improve it. Just make sure that you only close the cards with small credit limits and the accounts that aren’t very old. Keep your oldest and largest accounts open, even if you never charge on the cards. That will keep your credit history score up.
- Your account balances are zero. A major factor in determining credit score is a comparison of the amount of credit you have been extended to the amount of debt you owe. This gives banks an idea of how close you are to your credit limits. With a debt consolidation loan, your credit cards are wiped clean, making it look as if you have a lot of credit available that you aren’t using. Your new loan isn’t revolving debt, so it doesn’t count towards this part of your score.