Taking out a consolidation loan will likely show up on your credit report. But if you pay it on time and repay the entire amount by the agreed upon due date, then it shouldn’t negatively impact your credit score. While your score may temporarily dip after taking out a new loan or financial product, on-time payments will usually help to improve your overall score.
So what exactly is a consolidation loan? Consolidation means to combine into one. And a consolidation loan combines several smaller debts into one large loan. People use consolidation loans for several reasons, most notably to simplify their finances and monthly payments. Some borrowers are even able to get a lower overall interest rate with their new larger loan, compared to the average interest rate of the several smaller debts.
It makes sense that you would be concerned about your credit score when applying for, and taking out a new loan. Sometimes opening a new credit account, taking out a loan, or a line of credit can make your credit score drop temporarily. This is because you’re essentially adding to your debt load. And if you already have several loans or open accounts, the credit bureaus see this as a negative thing.
Luckily, this drop may only be temporary. While negative items may stay on your credit report for up to seven years if you make your payments on time and repay the loan as promised it may improve your credit score. Credit scores may rise and fall slightly over the course of your financial journey. This is normal. But large drops should be taken seriously and you should find ways to improve your credit if this happens.
If you do decide to go the route of consolidation, make sure you find a loan with a good interest rate. The better your credit score is, the easier it will be. First, consider traditional bank or credit union loans as these tend to offer better interest rates. But if you can’t get approved for one of these there are still options out there, including large personal installment loans.
