Debt Consolidation: How Does it Affect Your Credit Score?

Debt Consolidation: How Does it Affect Your Credit Score?

If you are a business owner or prospective one, then you’ve likely become recently aware of just how important your credit score is. At its very core, it is a measure of creditworthiness or “trust”; just like if you had friends regarded as being very honest/trustworthy, you would lend them money readily. 

Credit Score Composition

To form your credit score, companies bring together several factors; in this short article, we’ll take a look at what effect debt consolidation has on it. Fundamentally, in order for it to work in your favor, you must make a plan to reduce your overall principal even as you pay down the lower monthly debt that consolidation often facilitates. Credit score is also dependent on whether you have any balance transfers, your ratio of credit used to credit owned, the age of your accounts and whether or not you have any delinquencies like late payments and loan defaults.

Debt Consolidation Accomplishments

As denoted in the above, anything you can do to shore up the values associated that comprise your credit score will improve it. So for example, by securing a debt consolidation term that lowers your monthly payments to manageable levels, you can now afford to pay a bit more to cover both the interest and the principal.

Secondly, doing the above will reduce the very important ratio of credit used to credit owned; for example, if you hover around 35%, then that’s average and your credit score will rise by the next tally period – usually within a week or so. Always take advantage of the lowered monthly dues by paying more towards the principal; after all, the balance transfer to a lower-interest card is not inconsiderable, and you’ll want to make up that payment over the long-term, as well. In the meantime, you’ll enjoy a raised credit score and better terms on any new loans you pursue for business (or personal).