Managing multiple repayments and credit card/loan balances can be tricky, so it’s no surprise that more people are looking into ways they can streamline their finances.
One method that might be considered is debt consolidation. But, can this cause harm to your credit score?
In this blog, we take a look into the impacts this method may have on your credit score, so you can decide if it’s the right option for you.
But, first, it’s useful to know how the process works...
How does debt consolidation work?
It works by taking out a new form of borrowing, known as debt consolidation loans, to pay off several debts. In doing so, all your debts will be combined into a single loan, meaning you will only have one monthly repayment to make.
There is no specific type of loan you need to use in this process, in fact, it’s entirely dependent on your circumstances and preferences.
However, some finance options that can be used include:
- Unsecured loans –Borrowing which does not take a property or asset as security.
- Secured finance - A loan that is secured against a property or other valuable asset you own.
- Further advance – Extra borrowing from your existing mortgage provider.
Although it may sound complicated, the process is very simple and is a lot more common than you might think.
Can debt consolidation hurt your credit score?
In short, yes it can temporarily hurt your credit score.
When you make a credit application a hard credit search will be performed by your lender or bank. This is undertaken to assess your credit history and determine how reliable you would be at making repayments.
Whilst this is normal, hard credit checks can cause a temporary dip in your score and will be visible to any other lender or bank you apply with. That’s why it’s always a good idea to try and limit the number of credit applications you make in a short space of time.
After a certain period (usually about a year) this will recover, so long as you have made the monthly repayments on time.
From a long-term perspective, consolidating debts can have a positive impact on your credit score, provided you make your monthly repayments on time.
Past payments form a big part of your credit score, along with a few other factors. So, the good news is if you’re making payments on time it will boost your credit score and show that you’re a reliable borrower.
This can be positive if you previously struggled to make payments on time before you consolidated your debts, as it could help you to improve these negative marks.
On the other hand, if you’re consistently paying late or missing repayments altogether the impact on your score will be negative. Additionally, it’s important to speak to your existing lenders if you are paying late or missing repayments.
You can also obtain advice from debt advice charities or seek independent financial advice if you are considering a debt consolidation loan.
For more information on this option, you can look at our blog a complete guide to debt consolidation.
Summary
Although consolidating debts can cause a slight dip in your credit score in the short term, this shouldn’t deter you if doing so is beneficial to you. Following the initial credit search your credit score will improve, so long as repayments are being made on time. In fact, it may leave your credit score in a much stronger position than if you kept the existing credit and were struggling to make repayments on them.
Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.
