Debt Consolidation and Your Credit Score
Late payments can hurt your credit, so anything you can do to make regular payments will help you protect your credit score. If you have a significant amount of debt and are having trouble managing all of your payments, a debt consolidation loan may help you improve your credit score if you make your new loan payments consistently.
What is a debt consolidation loan?
A debt consolidation loan is a loan used to pay off other, potentially higher interest rate debts, like credit cards, auto loans or retail store credit. You pay off those debts with a debt consolidation loan and then make one monthly payment on the new loan.
How does it affect my credit?
Applying for a debt consolidation loan will most likely not impact your credit score significantly one way or the other. Since you are paying off several other debts with the new loan, credit rating agencies will note that your other accounts have been paid off. In fact, if you manage to make your debt consolidation loan payments consistently, your score may even improve over time.
Should I close my old accounts?
If you do use a debt consolidation loan to consolidate high-interest debt, it’s a good idea to carefully consider how to deal with the accounts you pay off. You may be tempted to close your credit card accounts in order to remove temptation. However, closing accounts can actually have a negative impact on your credit score. This is because credit bureaus look at the amount of credit you’re using compared with the total amount you have available. So closing zero balance accounts reduces your unused credit and may make it appear that you are overextended. In addition, credit bureaus look at the length of your credit history. (The longer you’ve been using credit responsibly, the better.) So if you do decide to close several accounts to remove temptation, consider closing the newest ones first.
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