Consolidating debts can improve credit
Debt consolidation can make repayment easier by consolidating multiple accounts into a single one. Consolidating debt also can save you money on interest and help you get out of debt faster, depending on your situation. Here are four ways to do it:
You can consolidate credit card debt
Paying down your monthly credit card balance on time and in full is the best way to improve your score and avoid paying interest.
However, those who have multiple high-interest credit cards and borrowers who have a hard time meeting all of the monthly payments may benefit from debt consolidation.
Consolidating your credit card debt simplifies your repayment process. It can also save you thousands of dollars in interest accrual, as personal loans have an average interest rate of 12.18%.
Faster payoff
If you qualify for a low-interest personal loan, you could pay off your debt in a significantly shorter amount of time.
Credit benefits
Thirty percent of your FICO Score is set by how much of your available credit you’re using, also known as your credit utilization ratio. If you’re using most of your available credit, it can be harder to get approved for other forms of debt and can lower your score.
With a consolidation loan, the amount of debt owed would still be on your credit report. However because personal loans are installment loans, they don’t impact your score as severely as credit cards. Consolidating your debt and making the monthly payments is a sure-fire way to quickly increase your score by lowering your utilization levels.
You can also use a balance transfer credit card to pay off your outstanding credit card debt. If you have good credit, you may be able to qualify for a balance transfer offer with a low or 0 percent interest rate for six, 12 or even up to 24 months.
You can consolidate student loans
Student loan consolidation is a popular loan management option among borrowers; it simplifies repayment by condensing multiple loans and can save money on interest.
However, consolidating your student debt isn’t the solution for every borrower. In some situations, it causes more harm than good.
You can consolidate both federal and private loans, but when it comes to federal loans, you should try consolidating them through the Department of Education.
Student loan consolidation may be a good fit if you:
• You have high-interest private student loan debt and
• Your new loan (whether federal or private) carries a much lower APR than your current student loan debt.
Credit benefits
One of the factors that scoring models pay attention to is the number of accounts with balances on your credit report. Known as your credit mix, it makes up 10% of your FICO score; while it’s not the largest scoring factor, it’s still important to keep an eye on how many accounts you have open.
By reducing your number of outstanding accounts, you’ll likely see your credit score improve. While it probably won’t jump significantly from this factor alone, it’s likely that you’ll see a credit score increase of at least a few points.
Consolidating your student debt can also save your credit report in the long-run if you miss your monthly payment and it shifts to delinquent status. Even though you’re only making one payment to your lender, you’re paying down all of your loans on the repayment plan. That being said, any delinquent payments will show up on your credit report for each active student loan and will remain on your report for seven years.
You can consolidate medical debt
According to data by Peterson-KFF Health System Tracker, nearly one in 10 U.S. adults have some form of medical debt. Although medical debt doesn’t accrue interest, it could damage your credit if left unattended.
Credit benefits
Medical debt is not reported to the credit bureaus. However, if your medical provider sends the account to collections, it could end up in your credit report. It’s worth noting that this scenario only applies to balances of $500 or more, and that have been unpaid for a year or more, after your doctor’s appointment.
By consolidating high medical bills, you can avoid getting negative marks on your report that could result from the account being sent to collections.
You can consolidate personal loans
Whether you’re trying to simplify your finances or get out of debt quicker, it might make sense to consolidate high-interest personal loans. This is especially true if your credit and income have improved since you first took out those loans.
Credit benefits
Because personal loans are installment accounts — not revolving — consolidating these loans into a new personal loan won’t lower your credit utilization rate. Your scores might benefit slightly if you reduce your number of accounts, but the credit inquiry and the presence of a new account on your report might offset that potential score increase.
However, if you can save money by consolidating your personal loans with a more affordable installment option, it probably makes sense to go for it. Even if your credit scores do take a slight hit from the new inquiry and loan, your scores can bounce back in time as the account ages and you manage it properly.