For this blog, we’ve teamed up with our partners at Fairstone.
The main benefits of a debt consolidation loan? It makes debt repayment easier and helps pay down debt faster. But, a debt consolidation loan can also help rebuild your credit over time.
Our partners at Fairstone explain how a debt consolidation loan can improve your credit score:
Paying off credit card balances can help lower your credit utilization and improve your credit score
Credit utilization is the amount of credit you’re using versus the amount of credit you have available. Generally, if you use more than 25% of the available credit on your credit cards it will impact your credit score, giving you a lower credit score rating. By using a debt consolidation loan to pay off credit card balances, you’ll lower your credit utilization which can help improve your credit score.
A simple and manageable payment schedule makes it easier to stay on top of payments
A debt consolidation loan allows you to combine multiple bills into one simple monthly payment. Plus, your lender can work with you to ensure your loan payment is manageable and fits in your budget. A simplified payments schedule makes it easier to manage loan payments and make payments on time. Making regular, on-time payments will improve your credit score over time.
You can improve your debt to income ratio
Debt to income ratio is the amount of debt payments you owe each month compared to how much income you’re earning. Since a debt consolidation loan provides a manageable payment schedule, you can focus on paying down your debt faster. The faster you pay down debt, the sooner you’ll improve your debt to income ratio. To access the best interest rates from lenders, aim to keep your debt to income ratio under 36%.
A structured payment plan will help you establish credit-building habits in the future
Credit cards and lines of credit are revolving debt, meaning there is no set payment period for the debt to be paid off. You’re only required to make the monthly minimum payment. Unfortunately, it’s difficult to pay down debt quickly by only making minimum payments.
Debt consolidation loans, or installment loans, offer a structured payment plan where the debt will be paid off at the end of the term (the number of months it takes to pay off the loan).
Tip: Choose a biweekly payment schedule for your consolidation loan – you can pay off your loan quickly and establish a routine for making regular debt payments.
Trying to get out of debt and improve your credit score at the same time can be overwhelming. But with a little hard work, and the right type of debt consolidation loan, you’ll be debt-free and have good credit sooner than you think!
Interested in a debt consolidation loan? Fairstone can help!
Find out if a Fairstone debt consolidation loan is right for you. You can get a free loan quote at Fairstone.ca to see how much money you could qualify for and what your payments might be. Plus, homeowners can access Fairstone’s lowest rates by securing their debt consolidation loan with the value of their house.