Is it True That Debt Consolidation Affects Your Credit Score?
Research shows that among all those who've got credit cards, the majority of them are in one kind of debt or another.
This comes with poor spending discipline and unfortunate circumstances.
There are actually two kinds of debts, secure and unsecure; if you choose to use debt consolidation to eliminate your debt, what you're doing is actually lumping up all your debts into one debt.
Now, the question is; would this affect your credit score in any way? To figure this out, you'd first have to know what is credit and how its measured.
A credit score is given figure representing the worthiness of the individual based on his or her financial history.
It's measure by the following divisions.
First would be when it comes to your account.
You would need to open a new account to consolidate your debts.
This particular account will bring down the average age of your credit history.
In addition to that, it is mandatory that you write a letter to the lenders asking them to close your previous account.
If you forget the letter or skip it, it would be stated in your report that the account was closed by your creditors and this will affect your credit score.
Furthermore, when you ask for a loan, your creditor would want to check your credit report and history and this would be stated as an inquiry on your report.
If you have too many inquiries, then it may result in a lower credit score because the lenders would conclude that you're borrowing more than you can afford.
Also, with debt consolidation, you would be in the risk of making late payments in which you would be charged late fees and such.
This will ruin your credit score too.
On the other hand, if you take good care to make all the right moves and get proper education on money management and debt consolidation, you should be able to keep a clean credit score in a long run.
This comes with poor spending discipline and unfortunate circumstances.
There are actually two kinds of debts, secure and unsecure; if you choose to use debt consolidation to eliminate your debt, what you're doing is actually lumping up all your debts into one debt.
Now, the question is; would this affect your credit score in any way? To figure this out, you'd first have to know what is credit and how its measured.
A credit score is given figure representing the worthiness of the individual based on his or her financial history.
It's measure by the following divisions.
- Payment History (35%)
- Total Outstanding Balance (30%)
- Age of Credit History (15%)
- Types of Credit Used (10%)
- Applications / Inquiries for New Credit (10%)
First would be when it comes to your account.
You would need to open a new account to consolidate your debts.
This particular account will bring down the average age of your credit history.
In addition to that, it is mandatory that you write a letter to the lenders asking them to close your previous account.
If you forget the letter or skip it, it would be stated in your report that the account was closed by your creditors and this will affect your credit score.
Furthermore, when you ask for a loan, your creditor would want to check your credit report and history and this would be stated as an inquiry on your report.
If you have too many inquiries, then it may result in a lower credit score because the lenders would conclude that you're borrowing more than you can afford.
Also, with debt consolidation, you would be in the risk of making late payments in which you would be charged late fees and such.
This will ruin your credit score too.
On the other hand, if you take good care to make all the right moves and get proper education on money management and debt consolidation, you should be able to keep a clean credit score in a long run.
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