Consolidating Debt Could Boost Your Score
According to a study conducted by LendingTree, consolidating credit card debt can help increase your credit score. The study found people who consolidated at least $5,000.00 saw an increase of 38 points on average within a month. The study also concluded that the overall amount of debt you pay off with a personal loan is directly correlated with the amount your credit score will increase. For example, if you paid off $10,000 in credit card debt, your score will go up an average of 49 points. If you only paid off $1,000 to $5,000, your score will only go up 17 points on average.
Consolidating your debt can help simplify your finances. Instead of paying off multiple lenders, you'll be making a single payment. This can also lower the interest rates you'll have to pay on the loans. In general, credit cards carry a high interest rate as this is considered an unsecured line of credit. Personal loans are secured and offer much lower interest rates that can result in thousands saved at the end of the loan.
A higher credit score can boost your chances of obtaining that apartment / house you were looking at, and lower your insurance premiums.
Possible Issues To Look Out For
You may encounter some obstacles if you decide to take this route. A debt consolidation loan is usually for people with lower credit (629 or lower) and may have higher interest rates. A balance transfer on the card may give lower interest rates but is typically for people with a FICO score of 690 or higher.
Make sure you understand the terms and conditions of your new loan. If you missed a payment during a promotional period, you may have to pay an even higher interest rate than your original loan. A missed payment could also tack on additional late fees and negatively impact your credit score.
Reminder
Always make sure that the new monthly payments of your loan can fit within your budget for the entire repayment period.
Shop for the best loans at your local credit unions, banks, and even some online lenders. You must be a member to obtain the loan from the credit union but they tend to offer lower interest rates. Banks will favor existing customers with good or excellent credit scores. Online lenders cater to all credit brackets. Just make sure the interest rate you will be paying is lower than your current combined interest rates.
