How A Debt Consolidation Loan Might Be Your Saviour

Boy dressed as a super hero, standing on edge of a rock shouting, "Hear my call! For I am... Debt Con Boy!"
“Feel the urge to travel afar? Or would you rather the joys of a brand new car? Wish for a house that comes equip with a moat? Or favour a voyage on a stylish new boat? It’s things like these that our hearts desire, but with a credit score at rock bottom, our expense could be fire.” That’s enough of us trying to play Dr Seuss. Credit scores, we have all heard of them, but we don’t know a lot about them. It’s basically what financial companies use to assess the risk in supplying us with money in the form of a personal loan. We have covered what a credit score is in a previous blog so we won’t go on to much about it. Our credit score affects our ability to apply for future loans greatly, so a low one could put our dreams of sailing around the world, on hold for quite a while. We know that if we can pay our bills at the end of the month, that over time, our credit score will improve, but this isn’t always possible for everyone. With debt on our hands we don’t always look appealing to creditors, and being unable to pay that debt on time each month, could make us look less appealing. This is why we need to look towards the silent saviour that constantly gives without asking for much in return, the debt consolidation loan. OK we know that was a terrible line, but the words hold true. A debt consolidation loan, which is a loan that consolidates our debt into one easy to manage loan, could be the tool to help us improve our credit score.

Pays off existing debt

A debt consolidation loan pays off the existing debt that we may have to other creditors. Having multiple creditors on our credit history looks bad during a credit check as it appears that we have acquired numerous amounts of debt from different creditors. The amount owed doesn’t appear, but the financial institutions still see something owing, so they assess the risk of supplying us with a loan as being higher. A debt consolidation loan can help fix this problem, as combining our current debts into one, will improve our score. It shows that we are taking responsibility by simplifying our finances, and with more manageable payments every month, we will find our credit score improves.

Utilisation ratio increases

An utilisation ratio is our credit limit vs the amount of credit in use. The more credit available, the lower the utilisation ratio, and so the higher the credit score. A debt consolidation loan helps with this as since it pays all our other forms of debt off to creditors; it leaves us back with full available credit. A loan that pays off five credit cards that equals to $20,000 would mean we could potentially have $20,000 worth of credit available. However, just because it is there, doesn’t mean we should go and spend it. A good utilisation ratio shows that we are confident with our finances and that we can be trusted with debt. Keeping this available credit limit high, helps show financial industries that we can trust ourselves with our spending and that we are not at risk of excessive consumption that could put ourselves back into further debt.

Easier more manageable payments

Now another potential big benefit of a debt consolidation loan to our credit score is that fact that we will be more inclined to pay off the existing debt we have. As we know, making payments on time will help our credit score gradually rise. So wouldn’t it make sense to try guarantee that we can make our payments on a regular basis? A debt consolidation loan does this for us, as we pay less monthly, with a lower interest rate and we don’t have to worry about multiple due dates sneaking up on us all the time. Our credit score and our bank account will thank us, as with every month that goes by, a gradual increase in both will occur.

Multiple applications look bad

Now, this information may be too late for some, but it could be useful in the future to know. Applying to various creditors for loan applications means that we will have multiple credit enquiries on our account which looks bad to financial providers and lowers our credit score. Instead of fishing around for the best rate, we should find a creditor that we know and trust, and keep our lending with them. This will increase our credit score as it will mean we will have fewer enquiries on our credit history and we will appear to have been more serviceable in the past. It works similar to consolidating our finances, as having it all in one place and not from various sources, will make us appear to be more reliable and trustworthy. Enquire about debt consolidation with your local credit union and find out whether it would be the right option for you. Secure your finances and your future. As making a start now, could improve your credit score over time and create opportunities that you never thought possible.

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