If you are trying to get out of debt, a consolidation loan appears to be a good option. Your term, interest rate, and what you do afterwards will determine if this loan will positively or negatively impact your credit.
Applying is a Hard-Inquiry Check
Since a consolidation loan is a personal loan or merging your loans into a new credit card, there will be a hard inquiry check. Your score will decrease by a few points and remain on your report for two years. This however would not be enough to warrant not applying if you do need this loan.
Your Credit Rating Could Decrease Due to Your Credit Worthiness
A credit report consists of a credit score and a credit rating. If you apply for credit elsewhere, the underwriter will take a look at your credit rating. Your credit rating includes your job stability, current income, and how you use your available credit lines. If an underwriter believes that you can increase your debt because you now have no balances on your credit cards, this could make your rating decrease.
High Interest Rates
Consolidation loans are meant to help people get out of a financial bind. If your credit is not above average, you could have a hard time obtaining an average interest rate loan. Some lenders prey on that and offer you a high-interest rate when compared to others. A higher rate means a higher payment and longer terms to pay your loan off. Some online installment loan lenders may provide a loan but you may end up paying more in the fees.
Missing a Payment
If you are not careful, you could get a consolidation loan with a higher payment than you were paying for all your split debts. Late payments or missing payments make a huge impact on your score, causing negative effects that will stay on your report for a while. For this reason, be cautious when signing up for consolidation loans. Ensure you know the interest rate, monthly payments, and if your payments will increase should you miss one.
Closing Your Accounts
After receiving a loan consolidation, you may feel relieved to be rid of your credit cards. You may not trust yourself with your open accounts. Closing your accounts will negatively impact your credit score. The longer your account stays open you’ll show a long credit history. You’ll also decrease your available credit, which will appear as though you’ve maxed out your credit limit. You’ll be a high-risk consumer at that time.
This post was contributed by Kayla McDonahue