What better way to start the year right than by taking care of your debts and working your way to better financial management, right? However, things are not as easy as it seems more so if you’re worried about whether getting a debt consolidation loan will negatively affect your credit score. Can getting a debt consolidation loan help you improve your credit score?
The short answer is yes although it may initially look like a no. When you get approved for a debt consolidation loan, there will be an initial decline in your credit score because it looks like you’ve incurred more debt. However, as you pay off your existing debts with the funds from your loan, you will see a gradual and steady improvement in your credit score as long as you do not get more debt and continuously work on a repayment
How Does A Debt Consolidation Loan Work?
When you get a debt consolidation loan, what you will be doing is essentially converting your high-interest debts into a single debt with a lower interest rate. Because of this, it will be easier for you to make payments for as well as track them. You will save money on interest and be able to use the savings to pay off the principal, thereby repaying your debt little by little. Another benefit is that a debt consolidation loan will have a lower monthly payment than the combined monthly bills for your high-interest loans. If you stick to the payment plan, you’ll find that your debts will be paid off faster too.
What Are Your Options for a Debt Consolidation Loan?
Not all debt consolidation loans are created equal. Some are easier to qualify for and some are easier to pay than others. The most popular ones are listed below:
- A personal loan can allow you to enjoy a slightly lower interest rate and an easier time to manage a single bill.
- Balance transfer credit cards have introductory periods that feature almost no interest if you meet the set requirements. They buy you some time to help you have a head start on payments.
- Retirement account loans let you tap your retirement fund. Failure to pay this back can incur heavy penalties and taxes.
- A HELOC or home equity loan allows you to have access to your home equity if you are a homeowner. These loans are easier to qualify for and have friendlier interest rates but know that failure to pay may result in you losing your home.
How Debt Consolidation Affects Credit Scores
A new credit application can mean that you will have a temporary lowering of your scores by a few points. If you’ll be opening a new credit account like a personal loan or a credit card, you will likewise experience a temporary lowering of your scores since you have a new debt. When you make payments on time and your credit ages, your score will rise. Know too that a debt consolidation loan will help you show improved payment history and give you a lower credit utilization ratio.
Is it Worth It to Apply for a Debt Consolidation Loan?
The answer is yes if you will be using a source of funds that will be most beneficial for you. If you’re a homeowner in Toronto or the GTA who is interested to apply for a debt consolidation loan using your home equity, contact us at Mortgage Central Canada for fast approval!