How are Debt Consolidation Loans going to hurt the Credit Score?
Let me ask you, how much you care about your health? Of course, you take a lot of care about it, by adding vitamins, minerals, proteins and a lot more to your diet. Then what about your credit score health?
You need to understand that the health of the credit score is as important as that of your physical health. It is important for you to maintain the score in proper terms, as this gives a negative effect on the borrowing of loans.
Okay, so, what exactly is a debt consolidation loan?
Consolidation of debts means combining all the debts and liabilities into one and clearing off them all at once.
Confused! I will put this in an easier way. Suppose you have multiple debts in your account, where you are struggling to pay the monthly payments to your lender. As this is not just about one EMI that you are paying, it is about paying multiple EMIs every month. Isn’t that a real burden? Yes, it is a burden to take on. So, to get this in a lighter form, debt consolidation loans have come into the picture. With this loan, all these multiple debts can be combined into one and can be paid off. So, now all you must pay is the interest rate for the loan taken. Isn’t that a simple way to clear your debts?
It is simple but complex when it comes to affecting the credit score. Just because of the smallest things that you do, your credit score will get hurt.
Below are the reasons how these loans hurt the credit score.
1. Piling up more debt: You should stop making this mistake of getting into new debts before even paying the old balances. If you give up to not spend any more amount on the new credit, then any improvement that takes place in the credit score will disappear. Once you consolidate the debts into a new account, it will automatically reduce your credit utilization quantitative relation. The lower the quantitative relation, the higher the FICO credit score is.
Suppose you don’t leave the credit limits alone on your older cards, then that will land you up in big trouble.
2. Hard inquiries: I can understand how important is for you to get out of the debt and to come out, you need to take up a loan. For that you need to do credit score inquiry. Remember that if you start doing multiple hard inquiries on the credit score, that will give a negative effect. This is because if you do the inquiry multiple times, it indicates that you are in dire need of money and might also default the payment. That is the reason lenders show the red flag saying that the loan will not be approved any time sooner.
3. Missing out the payment: All you have is just one loan to pay after consolidating all the debts. If you miss that one payment multiple times, then the lender will have no other choice but to send that report to the collection agency and ask them to collect the money.
This negative mark will be shown on the credit report for seven years and am sure that it will take a toll every time you want to borrow some money from the lender.
Aren’t all these confusing? All you must do is maintain your credit score properly to not push you in trouble. Though you have us for providing loans for bad credit borrowers, still you need to maintain it properly at least for future borrowings.