5 Tips to Improve Your Credit Score When Consolidating Debt
Updated July 2020
If you are considering debt consolidation or have already begun the process you might be concerned about what it could do to your credit score. It is common for credit scores to decline after consolidation, at least in the beginning. Fortunately, the effects are usually temporary and repairing your score is easier than you might think.
Once you have paid down your debts, reduced your spending and made a reliable budget, you can adopt good habits that will help you repair your credit.
As you go through the debt consolidation process, you may be tempted to watch your score and panic when you see it rise and fall. While you won’t be able to avoid some of these ups and downs, you can help yourself avoid some of the frustration and credit woes that accompany the process.
Following these tips can help you maintain or improve your credit score during consolidation. They will also put you on the right path to credit health so that your score can trend upwards in the months following your consolidation.
- Don’t close old accounts
- Monitor credit usage and keep your usage under 35%
- Don’t apply for more credit
- Check your credit report each month
- Pay on time and wait it out
Read on for an in depth description of each tip.
1. Don’t Close Old Accounts
After paying off some of your debt, you might think it’s best to close accounts that have a zero balance. You’ve finally gotten rid of that debt, so why would you want to keep the account around?
Surprisingly, closing your old credit cards could cause your credit score to fall. This happens because the length of your credit history is important to your score. A longer credit history indicates to lenders you have experience borrowing and repaying debt.
It’s usually better to keep your accounts open, even if you’re not using them. In order to maintain your credit score when consolidating debt, keep open accounts with a zero balance.
Exceptions to this rule
The exception to this tip is if you’ve consolidated credit cards that have an annual fee or if you are unable to curb your spending. Credit cards that charge an annual fee will almost always still charge you the fee regardless of if you’ve used the card or not. The positive effects on your credit score may not make up for the money you’re losing in fees.
Bonus tip to help your credit mix
If you feel you can keep your spending under control you may want to choose one account with a reasonable interest rate that you can use for daily expenses. Use the card for groceries or utility bills and be sure to pay down the balance at the end of every month. This works well if you have opted for a debt consolidation loan rather than transferring balances to another credit card. Showing the credit bureaus that you can regularly pay both your loan and your credit card will help demonstrate that you are responsibly using different types of credit.
2. Monitor Your Credit and Keep Your Usage Under 30%
Credit utilization is the amount of credit you’re currently using versus the amount of your credit limit. The closer you get to maxing out your available credit, the riskier you look to lenders. Having more available credit generally shows that you’re responsible with your credit usage and spending habits.
Credit usage makes up 30% of credit score. It’s generally recommended that you use no more than 30% of your credit limit across accounts. Keeping your balances below that rate can help your score improve in as little as 30 days.
3. Don’t Apply For More Credit
Applying for new loans, credit cards, and other credit accounts all at once could quickly drop your score. When you apply for a new account, lenders will make what’s known as a hard inquiry on your report. This inquiry can drop your score temporarily. Generally, a hard inquiry disappears from your
report after about 24 months.
Since hard inquiries expire, applying for one account may not have a huge effect on your score but applying for multiple credit accounts at once can have a big impact.
When you are in a debt consolidation program It’s best to avoid applying for any new credit. If you absolutely must apply for credit, make sure you look into your chances of approval before actually applying.
4. Check Your Credit Report Each Month
You can regularly check your report using a reporting serviceIf you notice a strange account or application on your report, you can take measures to report fraud. It’s usually much easier to stop fraud by catching it early than it is to repair your credit after extensive fraudulent activity.
Checking your score may also help improve your credit score when consolidating debt by allowing you to make changes in the way you’re managing debt. You should compare your score with past scores to see if it is moving up or down. If it’s improving, you know you’re on the right track and should keep doing what you’re doing. If you see it decreasing, it may be time to make changes to your credit and debt habits.
5. Pay On Time and Wait it Out
Credit scores usually take several months to years to see a significant improvement. Being patient is an important part of building a good credit score.
As you try to improve your credit score, focus on making your consolidated monthly payment on time. These payments will help your credit score and get you closer to paying off your debt.
Get Help Consolidating Your Debt
If you’re considering consolidating your debts with a debt relief program, you can reach out to a Certified Debt Specialist with your questions. The Accredited Debt Relief team is here to help answer those questions and give you professional advice on debt relief.
The Benefits of a Debt Relief Program
- Discussing your situation with a Certified Debt Specialist
- No need for collateral
- One fixed monthly payment
Get a free consultation today to learn more about debt relief.