Will Debt Consolidation hurt my chances for a New Loan?
While most people go through debt consolidation in the hopes that they can get rid of their loans, a lot of these people also realize that may need to get another loan someday. Paying off their credit cards and personal loans is often the first step to getting their finances in order so that they can qualify for a mortgage or get a loan for a new car. That’s why it’s so important to understand how a debt consolidation loan can affect your chances for a new loan.
In order to qualify for a new loan, a bank will review your current loans and your credit score along with your income. Since debt consolidation has no effect on your income, this last item won’t be affected whether you apply or not. Can a debt consolidation loan affect your credit score and loan history, though?
Your credit score is based on a number of factors, but the major things that affect it are your repayment history and the amount of credit you have used vs. the total amount of credit that has been extended to you. For example, a person who only carries a balance of $4,000 on a card with a $25,000 limit will have a higher score than someone who has maxed out that card. A debt consolidation loan, however, does not change the amount that you owe or the amount of credit that a bank has extended to you. It also will not affect the length of your credit history. For this reason, most people report that there is no change in their credit score after they go through debt consolidation.
When you apply for a new loan, a bank will also look at the list of loans that you currently have out. Often, if you have a lot of different loans, a bank will be hesitant to give you another one, even if your payments are current. A debt consolidation loan, however, combines all of your smaller loans together, making it seem as if you only have one loan to the bank.
<p data-sp-element=”content”>The lower payment that comes with a debt consolidation loan can also improve your chances of getting a new loan. When you owe less every month on your existing debt, then you have more to spend on a new loan payment.