The question of how to best manage debt is a common concern, particularly for hopeful homebuyers. One strategy for tackling existing debts is debt consolidation; which can help individuals by streamlining their repayments into one simple step. However, if you’re considering consolidating your debts you may be concerned that it could impact your credit score or even your ability to get a home loan in the future. In this blog we’ll examine how debt consolidation may impact your credit score, and what it means for prospective homebuyers.
What is debt consolidation?
Debt consolidation involves combining multiple debts into a single loan. This may provide benefits such as lower interest rates, a streamlined repayment process, and a longer repayment period. Some popular methods of debt consolidation include personal loans, credit card balance transfers, or home equity loans.
How does debt consolidation affect credit score?
Credit inquiry
Applying for a debt consolidation loan or lower rate credit card for balance transfer can lower your credit score temporarily. This impact will be more noticeable if you make multiple inquiries during your debt consolidation research.
Opening a new account
If you need to open a new credit account for your debt consolidation, this may lower your credit score. This is because having multiple accounts will reduce the average age of your credit accounts, and will increase credit utilisation.
Credit utilisation ratio
Consolidating debt can change your overall credit utilisation ratio. This ratio looks at how much credit you’re using compared to your total credit limit. Having a lower credit utilisation ratio normally results in a better credit score.
Overall debt
Successfully managing and reducing your total debt through consolidation can also positively impact your creditworthiness, as it shows a proactive approach to debt management.
Can I apply for a mortgage if I have consolidated debt?
Having consolidated debt doesn’t necessarily mean your mortgage process will be affected. It really depends on your overall financial health, and whether the consolidation has improved your repayment routine. Debt consolidation, when done correctly, can actually strengthen your credit score and financial health overtime, due to having streamlined repayments and better terms.
Speaking with a mortgage broker about your concerns and financial position is a great way to get a better idea of how consolidating debt may impact your credit score. Our team of expert mortgage brokers can help you with your home loan needs. Book an appointment with one of our Borro brokers today or call the team on 1300 1BORRO.
