A Debt consolidation loan is a loan where you get a lump sum to pay off your old debts. Afterward, you will make a monthly payment to the new debt. Debt consolidation loans can cause you to lose some credit score because a hard inquiry must be made every time you apply for a new loan. However, new credit only accounts for a small portion of the credit score so it shouldn’t matter much.
The more important thing to be emphasized is your punctualness in submitting the payment to the loan. If you are late in submitting a payment, they may report it to the credit bureau and it will cause you to lose more points in your credit score. On the other hand, if you promptly make payment, you will see an improvement on your credit score after a few months.
Taking out a debt consolidation loan prevents you from having to keep track of multiple due dates. Now that you only have one due date to cope, you should have no problem in remembering to make your payment promptly. It will also help to improve your credit score if this is the second type of loan that you take out. You must only have one type of loan on your credit report when you apply for the loan in order to improve your credit score.
Debt consolidation personal loan allows you to obtain a lower interest rate and save money in paying back the loan. Lower interest rate means you will be able to settle the debt faster. If you are having problem coping with the monthly payment, choosing a longer repayment term on your personal loan will help to reduce your monthly payment.
If you use the loan to pay off your credit card, make sure you don’t use your credit card anymore. It is best not to close your credit card accounts during the time you repay the loan but keep them opened to prevent hurting your credit score. If you can’t control yourself from not using the card, then it’d be better for you to close down the account. You could easily recover from your credit score after that and it will be better than being trapped in a credit card debt cycle again.
You should not take out a debt consolidation loan if you are going to make a big purchase in the near future. This is because the hard inquiry is going to cause your credit score to drop and prevent you from being qualified for the loan which you plan to take out to make a big purchase. If you have financial problems, it is best not to take out a new personal loan to consolidate your debt as it may cause you more troubles afterwards.