Does debt consolidation affect your credit score?

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Do you find yourself juggling multiple debt repayments each month? What if you could merge these all together into one single outgoing? That is exactly what debt consolidation loans are designed to do.

But with so many factors at play—like existing debts, repayment history, or applying for a new loan—you might be wondering how debt consolidation will affect your credit score.

In this guide, we explore how you can take back control of your finances with a debt consolidation loan—and what impact this may have on your credit score.

What is debt consolidation?

Managing multiple debt repayments each month can be confusing, and not to mention hard work. Multiple interest rates can also make this an expensive way to pay off outstanding debts.

Debt consolidation simplifies this process by combining all of your debt into a single monthly repayment—this could include loans, credit cards, and overdrafts. Tracking your debt and outgoings becomes easier as a result, and you’re less likely to miss a repayment.

How does debt consolidation work?

The most common route to consolidating debt begins with taking out a loan large enough to pay off everything you owe. You might be thinking—isn’t that just getting me into more debt? 

Really, you’re just moving all of your debt into one pot. You’ll still have the same outstanding balance, but it will all be visible in one place, and paid back to one lender.

Having only one repayment a month may make your debt easier to manage, therefore making it easier for you to budget. Pair this with switching to a lower interest rate loan than your previous, and you could easily be saving yourself money each month.

Should you choose a loan that spreads your debt repayment out over a longer period, you may be able to reduce your monthly repayment amount. The downside to this is you will pay more interest overall, though with a smaller monthly repayment you will be less likely to miss one, and more likely to keep your credit score protected.

On the other hand, if you were to shorten the term of your debt, you could pay off what you owe quicker and potentially reduce the overall interest paid. Just note that if you’re using your debt consolidation loan to repay other loans, an early repayment charge might be applied, so it’s always worth checking the terms.

Advantages of debt consolidation loans

Debt consolidation can be a great financial step for a lot of people, and a way to take back control of your finances. Some of the main advantages that come with it are:

  • Simplified debt management—all of your debt in one place
  • You will only owe one lender
  • You only have to make one monthly repayment
  • Monthly repayments are tailored to you—by spreading out your payments over a longer term, you may find yourself paying less each month (though you may be paying more overall at the end of the loan)
  • With just one monthly repayment to manage, you are less likely to miss a repayment or fall behind, helping to keep your credit score protected
  • You may pay a lower interest rate and save money on your borrowing
  • You may increase your credit score in the long run
  • There will be an end in sight—rather than paying off one debt and still having to worry about another, you’ll finish paying off all outstanding debt in one go

Disadvantages of debt consolidation loans

As well as all of the positives, there are some potentially negative considerations to be made before you make the decision to consolidate your debt:

  • By spreading your debt over a longer period, you may be paying more in interest by the end of the loan than you otherwise would
  • If you begin with a poor credit score, you may only be able to get a new loan at a high interest rate
  • There may be additional fees to consider when setting up a consolidation loan, such as early repayment charges when closing your existing loans

Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it. Think carefully before securing other debts against your home.

Types of debt consolidation

There are a number of options to choose between when looking at consolidating your debt. It’s important to consider which of these options best suits your financial situation, before you start to apply.

Secured debt consolidation loan

A secured debt consolidation loan will be secured against an asset, such as your property. As a result, secured loans—also known as homeowner loans—are only an option if you’re a homeowner. This is an assurance to your lender that you are committed to paying off your debt. 

With this additional security, a secured loan may come with a lower interest rate or longer repayment term than an unsecured loan. This means smaller, more manageable monthly repayments.

All loans come with their own risk, and a secured loan is no exception. If you fail to make repayments on debt secured to your home, you risk it being repossessed. Think carefully before making the decision to secure any debt 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. Think carefully before securing other debts against your home.

Unsecured debt consolidation loan

An unsecured debt consolidation loan can be taken out without putting any of your assets at risk. You are more likely to be approved for an unsecured loan if you already have a good credit score.

You may find that with an unsecured loan, your interest rate will be higher than if you opted to secure your loan against an asset. The rate that you are eligible for will really come down to your credit score and current circumstances. It’s worth doing a quick calculation to check whether your monthly payments are likelyto be lower with an unsecured debt consolidation loan. 

Balance transfer credit cards

If you are looking to consolidate multiple credit card debts, you may opt for a balance transfer credit card. In this case, you will move your existing credit card balance onto a new credit card with a different provider—you cannot transfer between two cards with the same provider.

You may encounter transfer fees when moving your balance onto a new credit card, and you will pay interest. These will depend on which provider and which plan you choose.

It’s also worth noting that most balance transfer cards will come with a 0% purchase period, during which you can pause interest building on your card balance. This gives you a chance to pay things off without worrying about new debt building up.

Keep in mind that, once the 0% period ends, the card’s usual APR will apply. So plan how you will use the interest-free period wisely, to avoid any unexpected interest.

Set up a debt management plan

If the above options aren’t possible for you, you could consider a debt management plan. To find out more, use our debt solution checker or visit Money Helper for free, impartial advice.

Debt consolidation and credit scores

Any significant movement within your bank accounts has the potential to affect your credit score—some in more positive ways than others.

Does debt consolidation hurt your credit score?

Most of the negative impact your credit score receives through debt consolidation is temporary, and can be built back up through consistent monthly repayments.

  • When you apply for the new form of credit, a hard inquiry will be undertaken and may damage your score
  • When opening a new credit account, the new credit risk you pose may cause a temporary decrease in your credit score
  • The history built up from years on one credit account may be lost and cause a drop in your score
  • If loan repayments are late or missed, this will negatively affect your credit score

Will consolidating my debt improve my credit score?

In the long term, so long as you keep on top of your payments your credit score should see an overall improvement. Some factors that can boost this are:

  • Lower credit utilisation ratio as you repay your loan—proof you are using less of your available credit and managing your outstanding debt
  • A fresh slate in order to build up an improved payment history
  • You may pay less interest on a debt consolidation loan, meaning you can make larger repayments. This means you could pay off your debt quicker, therefore increasing your credit score

What does this mean for my credit score?

Although you may initially see a dip in your credit score, with time and consistency, paying off your debt with one consolidated loan should improve your credit score. Depending on the amount you owe, it could take anywhere between 6 and 24 months to see that improvement.

The faster you pay off your debt, the sooner your credit score is likely to improve. There are other things you can do in the meantime to boost your credit score a few points.

How to get approved for a debt consolidation loan

There are a few basic steps to be taken in order to set up your loan consolidation.

  • Check your eligibility
  • Check your current credit score for errors that may prevent you from being approved—there may be other quick wins to boost your score, such as registering to vote
  • Find the debt consolidation plan that best suits you, don’t just settle for the first plan you see
  • Fill out an application
  • Wait to be approved/for your personal rate

Debt consolidation loans for bad credit

There are lenders who will tailor their loan offers to you, no matter what your current credit score looks like.You may not be accepted to just any loan that you apply for.

If your credit score is on the low side, there may be guarantor loan options available to consider that could give you access to lower interest rates. Personal loans will likely have higher interest rates if you have bad credit, so it is always best to consider if switching credit products is actually going to benefit you.

Keen to get started? Start a search to check your eligibility with over 50 UK lenders to quickly find out your options without affecting your credit score. We can also show you your chance of acceptance with many of our lenders before you apply.

A pre-approved loan requires all the information in an application to be correct, subject to final fraud and lender checks. Your loan application will still require a hard check on your credit report to confirm this.

Compare your debt consolidation options

Ready to retake control of your debts? Check your eligibility and find the best debt consolidation loan for you.

With no impact on your credit score, same day funds, and a wide panel of lenders—it’s quick, easy, and obligation free to take a look at the options available to you.

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