February 15, 2022

The Credit Building Benefits of Debt Consolidation

Another benefit of debt consolidation, which is less known but just as important as the savings, is the credit building benefit.

Kaye

Debt consolidation is a great way to save money by reducing your interest payments. Such savings are often the primary motivation for one to consolidate their debt and is a benefit that everyone is aware of.

Another benefit of debt consolidation, which is less known but just as important as the savings, is the credit building benefit.

If your debt is currently on credit cards and you consolidate the debt by converting it into an installment loan, you are building your credit. 

Debt utilization which makes up 30% of your credit score only considers credit cards (revolving debt).

While exchanging 10k in credit card debt for a 10k personal loan, a 401k loan or a cash-out refinance doesn’t lower your liabilities on a balance sheet, the credit firms and by extension your credit score considers your debt usage to have been reduced by 10k!

(A balance transfer credit card will provide less of a benefit but is case-specific as it’s based on what your current utilization is and what % of the card’s limit you will utilize for the debt consolidation)

Additionally, the new installment loan (such as home equity), gives you the opportunity to add good credit-building behavior through installment debt payments. The extent of this credit-building impact ranges from minimal to significant based on the composition of your credit profile.

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