How does debt consolidation impact your CIBIL score?
Have you ever faced a situation where you need to simultaneously pay your Credit Card bills, Car Loan EMIs, and Home Loan EMIs every month? In such cases, you can consider a debt consolidation strategy to simplify your life and streamline your debts.
What is debt consolidation?
The meaning of Consolidation Loans is combining multiple financial obligations, including existing Loans, Credit Card balances, and other outstanding debts, into a single Personal Loan. It is essential to note that they offer lower interest rates, longer repayment tenures, and make monthly payments manageable for borrowers.
How does it work?
Assess your current debts, including your Credit Card balances, Personal Loans, and other financial obligations. List the total owed amount, interest rates charged on each Loan, and monthly repayments.
Research various debt consolidation options available, such as Personal Loans, Balance Transfer Credit Cards, Home Equity Loans, and Top-Up Home Loans.
Select the consolidation method which aligns with your needs and financial situation. Consider each option’s interest rates, fees, repayment terms, and associated risks. Also, consider using the Personal Loan EMI calculator to compute the monthly instalment amount. Enter the Loan amount, interest rate, and tenure to get instant results.
After determining the most suitable strategy, apply for a Loan or Credit Card facilitating consolidation.
After approval, you receive the Consolidation Loan or Credit Card funds in your account. Use them to pay off your debts.
Later, you will be responsible for making a single monthly payment on the new Loan or credit line, according to the terms and conditions outlined in the agreement.
Debt consolidation and its impact on CIBIL scores
New credit applications:Banks conduct a hard enquiry on customers when they apply for a Balance Transfer Credit Card or Personal Loan as part of their debt consolidation plan. This may slightly decrease their credit score but is useful for overall finance management.
Low credit age:Your credit score tends to improve as your credit accounts age and showcase a positive history of on-time payments. However, opening a new one can reduce your account’s average age, lowering your credit score.
Low credit utilisation ratio:Credit utilisation measures the percentage of your total available credit that you use. When you establish a new debt consolidation account, your available credit typically increases, potentially decreasing your credit utilisation ratio. Lower credit utilisation can offset some of the adverse effects of opening a new account.
Enhanced payment history:Consistently making on-time payments on your new Loan will gradually boost your credit score. Your payment history significantly influences your credit score, highlighting the importance of always meeting payment deadlines.
After learning the meaning of Consolidation Loans, you need to maintain a good credit score to secure favourable terms and the repayment capacity for regular payments.
Conclusion
To examine whether debt consolidation is appropriate for your unique financial circumstances, you must conduct thorough research and, if necessary, seek professional guidance.