Ways Debt Consolidation Hurt Your Credit

Triston Martin

Nov 02, 2022

If you are not cautious, consolidating your outstanding accounts may lower your stress level, simplify the repayment process, and, most significantly, save you money on interest costs over time. However, this strategy might hurt your credit score and history if you are not diligent.

Hard Inquiries

The lender will verify your credit history when you submit an application for a new credit account to consolidate debt. This will result in what is known as a "hard inquiry" being recorded on your credit report. Because creditors see new credit applications as an indication of potential risk, your credit score may temporarily drop by up to five points for each hard inquiry performed. If you want to avoid significantly impacting your credit score, you should only apply for loans or balance transfer cards for which you are eligible.

Please do not apply for new accounts at every turn; keep your fingers crossed that you will be granted them. Applications for credit cards or personal loans that result in several hard inquiries within a short period would undoubtedly be detrimental to one's credit score. Even while the effect of those queries on your credit score will only last for one year, the records of those inquiries will remain on your credit history for two years, which may raise a red signal for potential future lenders. A short drop in your credit score may not be significant if, on the other hand, you won't (and shouldn't) establish another new line of credit any soon if you are consolidating your debt since you won't afford it.

Your Average Credit Age

The average age of all of your credit accounts will increase due to opening a new credit card or taking out a loan for debt consolidation; nevertheless, this will temporarily lower your credit score. Your FICO credit score is determined partly by the duration of your credit history, which accounts for 15% of the total, and especially considers the age of your most recent account.

Because a brand-new account does not yet have a good credit history, your score will improve as the fund matures and you maintain a record of on-time payments. The accumulation of more debt after the completion of the consolidation process is one of the most significant potential downsides linked with the strategy. If you give in to the urge to spend on a credit card that you have just finished paying off, whatever gains to the credit score that you have seen will rapidly evaporate.

Closing Old Credit Cards Reduces Available Credit

If the prior caution has scared you, you shouldn't put too much pressure on yourself to cut down on your expenditures. That is, don't go so far as to cancel those old credit cards that have a zero balance on them. That will harm your credit score. While you work toward paying off your combined debt, maintaining open credit card accounts that are also paid in full will help you lower the all-important credit usage ratio that was just covered. This will have a beneficial influence on your credit score. Your credit score may blow if you get rid of your credit cards.

See how those unused cards may help you pay down the debt on the card you transferred your balance. Therefore, rather than cancelling cards that aren't being used, put the credits on those cards somewhere safe while you pay off the aggregated debt. If you think you may cheat, you should put the actual cards in a safe or put them in water to freeze them. To rid yourself of any further temptation, deactivate all the automated payments associated with those cards and delete any stored card information from any online shopping accounts you may have.

Being Late

It is of the utmost importance that you be prompt with every one of your debt consolidation payments from this point on until the complete total has been paid off. Your payment history has the most significant impact on your FICO score, and any record of payments that were made late will lower your score. If you disregard the amount of your debt consolidation loan and stop making payments on it, your account will become overdue, and the lender will turn it over to collectors. Your credit will take a significant hit until seven years have passed since the collection records shown on your credit report, after which they will be removed.

Suppose you suddenly find yourself in a challenging financial situation and are concerned that you won't be able to make a payment on your consolidated debt. In that case, you should contact the company that issued your credit card or loan before your payment becomes overdue and your credit score suffers. There may be choices available for those who are experiencing severe financial difficulties.

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