Will a Debt Consolidation Loan Help My Credit Score?
A: Debt consolidation loans are one of many alternatives to help improve an individual’s financial position. Debt consolidation loans can reduce a number of monthly debt payments into one consolidated payment that will usually have a much lower monthly payment. The debt consolidation can certainly reduce monthly payments and reduce stress but the impact on credit scores will generally be fairly small shortly after the loan. Over time a debt consolidation loan can improve a credit score more significantly.
The main factors that are used to calculate a credit score include: payment history, amount of debt owed, length of credit history, new credit and types of credit used. Based on this information, a reasonable conclusion is that the credit score will not change since none of these factors are technically altered. The amount of debt an individual has remains the same, the debt is just moved on to one account from several accounts. And though any accounts that may have been late in the past are now paid off and consolidated into one loan, those payment histories will still remain in the credit report.
The factor used in credit score models that does improve, is a subset of the amount owed. Measuring the amount owed on an individual’s credit report to determine a credit score evaluates several aspects of the accounts including the total amount owed on accounts, the amount owing on specific types of accounts, the number of accounts with balances, the proportion of credit lines used or the proportion of balances on revolving credit accounts such as credit cards to the total credit limit, and the proportion of installment loan amounts still due or the proportion of installment loan balances to the original loan amount.
One of the factors that changes with a consolidation loan, mentioned in the list above, is credit utilization or the total balances in relation to the available credit. Since the new consolidation loan pays off a number of other balances on credit cards and other accounts that are included in the new consolidation loan, those accounts will now experience a measurable increase in available credit. The new loan doesn’t change the amount of debt; it simply increases the total available credit with the new loan amount and reduces balances on more than one account that were paid off with the new loan. Over time this will increase the credit score.
Since the component of the credit score that will be impacted the most by the consolidation loan is the amount of credit available, which has become available due to the new consolidation loan, these accounts should not be closed. If the accounts are closed after they are paid off, this will reduce the amount of credit available, thus lowering the credit score.
Overall, it can be very difficult to say how any one single factor or new information will impact a credit score because the value of each factor depends on the overall information in the credit report. The credit score is dependent on the mix of information, which varies from person to person and for any one person over time.
Increase Your Credit Score While Removing Delinquent Credit
Generally the biggest component of credit repair and improving a credit score is eliminating the delinquent credit accounts from your credit report. Removing delinquent credit accounts requires written disputes to the credit reporting agency and entails patience, good execution and time. While this process is taking place, it is prudent to work on the rest of the credit report and credit accounts to improve the credit score.
Two approaches that can help measurably with the credit report and credit score while fixing delinquent items is to add positive data and keep all other accounts current and active.
While you working on removing the bad credit it is very helpful to improve the credit score. This means you don’t want to let your credit report remain inactive. The faster you begin to re-establish more credit and good credit the faster you’ll improve your credit score.
Keeping up with the current monthly payments for accounts that are in the credit report is the first step to help control a bad credit score. Even when most credit accounts are delinquent or charged off it is important to pay the current bills on time while cleaning up delinquent accounts and adding new credit. This action will at least prevent the credit score from deteriorating further and help it steadily rise.
One of the best places to start to build a solid credit history is to obtain a secured credit card. A secured credit card can offer those individuals with poor credit or even no credit the opportunity to obtain credit and reestablish a payment history that will ultimately improve the credit score.
How quickly someone can improve their credit score from past problems will be greatly dependent upon what actions are taken immediately. The longer late payments are made, the longer the credit score will remain low and if new credit is added sooner the faster the score can start to improve.
Quite frankly, as damaging as previous severe delinquency is in a credit report, the scoring models are more dependent on recent credit activity than past activity. Using credit now and making timely payments while adding new credit accounts is a great way to improve a credit score.
A good starting point for adding credit is the secured credit card or a credit card offered by credit card companies for people who have less than perfect credit. Recommended sites include: www.bestcreditcardrates.com and www.lowestcreditcardrates.com.