Did you take more loans than you can actually handle? If so, there’s a risk of repayment failure. Debt consolidation loans serve as a backup plan for people struggling with defaults and high interests and fees.
If you want to repay your debts consolidate your loans, you only need to apply for a single loan for a huge amount to pay off several smaller loans. This makes you liable only to one creditor. You may avail of lower interest rates than what you were paying before, or you could opt for a longer repayment term to reduce the amount you need to pay each month.
Debt consolidation loan can ‘heal’ your credit
Consolidating debts has no negative impact on your credit score if you do it right. In fact, it works the other way. Whenever a credit card is settled, it will more than likely improve your credit score.
Payment history
Remember that payment history covers 35 per cent of your total credit score. It is partially because lenders look into your past long-term payment behaviour to forecast how you will manage your debts in the future.
So, if you have instalment loans and credit cards, your credit history will reflect how you manage these revolving loans. If you kept on missing your credit card repayments each month, or you have huge outstanding mortgage instalment that you haven’t updated for several months, the severity of such behavior will be taken into consideration by the credit bureaus in computing your credit score.
Since both loan payment and credit card payment are given the same weight, not paying a very low credit card balance will be given equal weight as missing your huge loan instalment. The key is to make timely payments on a consistent basis every month. When you consolidate your debts this aspect will be taken cared of—simply because all your outstanding consumer debts will be fully paid.
Credit utilisation
When the percentage of the available credit that you have borrowed exceeds 30%, your credit score may suffer. It is because credit utilization makes up about 30% of your total credit rating. If you habitually max out your credit cards, perhaps because you use it in lieu of cash when shopping for your daily necessities, or you have very close to their credit limits-lenders may consider you as someone who is not responsible in handling debts.
As a borrower, you are expected to maintain low credit card balances. While there is no benchmark credit utilization ratio that will ensure that your credit score will not go down, sticking to the 30-per cent rule could surely help you maintain a good credit rating. It is because the utilization rate makes up around 2/3 of your current credit rating. If you have multiple cards and you spend more than half of the credit limit and you still carry big balances, it will be difficult to achieve a good credit score.
Length of credit history
You don’t have to close your oldest credit card accounts when consolidating a loan. Simply pay off the outstanding balances and keep it active, by charging a little amount each month. Let’s say, you use it to buy your favourite cup of coffee each week, or to pay off gym membership. Just make sure that you will still have the extra cash to pay it off each month. It is not advisable to close your oldest account because the length of credit history matters. The length of time that you opened your account and the length of time since you last sued it comprises around 15% of your score.
New credit and credit mix
If you only have credit cards but you have no instalment loans, a debt consolidation loan can help you boost your credit mix rating. But take note that new credit and credit mix only comprise around 10 per cent of your total credit score, or if you are only taking out a new loan, in addition to existing ones just to boost the credit rating—that wouldn’t be a good idea at all.
Those who have made several hard inquiries recently may also suffer from a bad credit score simply because they sent too many applications, which can be considered as a new credit. So, it is not just opening several credit lines that should be avoided, steer clear from making several; hard inquiries as well, in\\within a short period of time.
It helps you deal with your unique financial situation
Debt consolidation loans have various purposes. You can use it to stop taking on more debts while keeping your accounts open—or to close high-interest loans and build good credit in a debt-free way. Reducing your total debt is one of the most important reasons for consolidating a loan, and building your credit is an added bonus.
Before you take out a Consolidation Loans, try to know all of your options by making an enquiry at NSW Mortgage Corp today!
