The One Hack That Will Instantly Boost Your Credit Score

As of July 2019, there were more than 19.6 million Americans having unsecured personal loans. Many of these loans were issued precisely for consolidating debts. As shown by the study conducted by TransUnion, 68% of such people managed to increase their credit scores by at least 20 points. More importantly, the positive effects of consolidation were observed for a period of at least one year.

What the TransUnion Study Actually Found

These figures paint a very clear picture. People who got a debt consolidation loan managed to repay 58% of their total credit card balance through that loan. On average, credit card balances fell from $14,015 to $5,855. This is a massive decrease.

For more than 75% of debt consolidation instances, the balances on the customers' credit cards have been reduced by 60% or more. How would this affect their credit utilization rate, one of the factors having a big influence on their FICO score?

How did debt consolidation affect people with different levels of credit scores?

Those who initially had low ratings were the beneficiaries. Subprime borrowers enjoyed an 84% improvement rate, where their credit scores improved by at least 20 points. The results were equally impressive for prime borrowers.

"Consolidating credit card debts into a single payment plan not only helps reduce what you owe but also sets off a series of actions that could lead to improved credit ratings, better terms from creditors, and access to fresh lines of credit.

There is yet another advantage in this case. Improved credit rating made these consumers more attractive to lenders, resulting in credit approvals. New credit is among the five key components that determine your FICO score according to TransUnion, Equifax, and Experian.

Is a Debt Consolidation Loan Actually a Debt Trap?

This is the dilemma that keeps most people from making their next move. Critics contend that by consolidating your loans, all you do is create additional debt for yourself especially when your loans come with extremely high-interest rates since you have poor credit.

To some extent, this criticism has a valid point, although they fail to take note of an important factor.

This must be taken into consideration that not all types of debts are considered as being harmful. These include mortgages, student loans, and small business loans because they enable one to increase their income and wealth. The bad type of debt includes borrowing funds to purchase something that loses its value in a short period, such as using credit cards impulsively. Debt consolidation lies somewhere in between.

In this context, a debt consolidation would be considered a positive thing if it enables one to save money through lower interest rates than their previous loans, particularly when using the loan to repay the earlier debts. On the other hand, if an individual has consolidated his or her loans but keeps on spending with the credit card, he or she has a problem.

Pro Tip:

Before applying for debt consolidation loans, compute your current interest payments on your debts and contrast them against what you'll pay once you consolidate your debts. If there's enough of a difference in favor of consolidation, then the latter would be the best option.

According to TransUnion's study, the use of debt consolidation loans can be considered responsible since those who have such loans are less likely to experience credit card delinquencies than others. For example, within the prime credit score category, the serious delinquency ratio of debt consolidation loans is only 1.1%, which is much smaller than the respective value of 2.4% for non-consolidation loans. It appears that most individuals tend to use their consolidation loans appropriately.

Key Things to Think About Before You Apply

Using debt consolidation loans can be quite effective in managing one's financial situation, but jumping into such an arrangement without thinking about the issues above is not a good idea.

How Much Debt Are You Actually Carrying?

Having a balance of $1,000 and having a balance of $15,000 is not the same. The first is easy to manage as it can be paid off through reducing costs and getting a little help from your relatives in a month or two. Debt consolidation becomes useful when you owe money at a level which requires such an approach.

Is the Interest Rate Actually Better?

This point cannot be argued. Consolidating debts means nothing when the cost of borrowing is no better than the current one. It should be significantly lower in order to make a loan advantageous for the borrower. Personal loan rates are around 10% while rates on credit cards are 18%. Your personal rate will depend on your credit history.

Nowadays, many online lenders allow you to know your interest rate through a soft pull on your credit report. Take advantage of this opportunity

What Are the Repayment Terms?

Usually, the term length for personal loans ranges between one year to seven years; however, in some cases, the lender may allow the term length to extend up to ten years. The longer the term length, the lower will be the monthly repayments, but on the other hand, you will be required to pay a higher amount of interest compared to when opting for a shorter term length.

Go Directly to a Lender or Use a Marketplace

If you decide to proceed with applying, steer clear of the debt relief firms, and contact the lenders directly or visit LendingTree or Credible for an easier process. They connect you with several lenders and provide you with the rates in return for nothing more than your data.

The debt relief firms will not do you any good – their extra charges will cost you more than the actual loan would cost. They should be used only when necessary for the purpose of debt management/settlement.

Watch Out for Lender Fees

The differences in origination fees, late payment penalty charges, and other costs among lenders may be substantial. Today more lenders choose to eliminate the need for origination fees and make the interest the sole source of profits for them. It is vital to check the fine print before signing any documents.

"Once the fees are accounted for, a reduced interest rate starts losing its value. Make sure to consider the cost of the whole deal."

Pro Tip:

You will want to use a comparison tool offered by a loan site such as Credible and LendingTree that enables you to apply to different companies at once. You won't waste much time on applying to several lenders, and there won't be any hard checks on your credit report.

Top Personal Loan Options for Debt Consolidation

Here are a few good lenders to consider when you decide on using a debt consolidation loan:

Credible

Credit Score: 680+ | Borrowing Amount: $1,000-$100,000 | Terms: 18-84 Months | Interest Rate: 6.25%-35.99%

LendingTree

Credit Score: None | Borrowing Amount: $1,000-$50,000 | Terms: 3-180 Months | Interest Rate: 6.99%-35.99%

LendingClub

Credit Score: 600+ | Borrowing Amount: $1,000-$40,000 | Terms: 3/5 Years | Interest Rate: 7.90%-35.99%

AmOne

Minimum credit score: Not specified | Amount borrowed: $1,000-$40,000 | Term of loan: 24-84 months | Annual interest rate: 5.99%-35.99%

Upgrade

Minimum credit score: 620 | Amount borrowed: $1,000-$50,000 | Term of loan: 2 or 5 years | Annual interest rate: 7.99%-35.99%

Final Thought: Is It Possible to Improve Your Credit Score Using a Debt Consolidation Loan?

A consolidation loan does not magically boost your credit score, but the studies backing its effectiveness are impressive enough. If utilized properly, you will lower your credit card debts, lower your credit utilization rate, and boost your credit score. That is true according to TransUnion’s research, which proves that most people are benefiting greatly from this approach.

Nevertheless, your success relies on the proper planning process. Think about your options, calculate your budgeting opportunities, find the best lender for you. Take your time with this and see how good the outcome may be, and you will realize why your consolidation loan may be the best investment this year.