Credit utilization is important, as it constitutes about a third of your overall credit score

Once you combine all your credit card balances into the new debt consolidation loan, all these cards will be at zero balance. This is a key step on your way to becoming debt free. Credit cards with low or no balances on them are also good for your credit rating, since they improve your overall credit utilization.

Credit utilization, meaning the amount of available credit a person has borrowed, is one of the five factors used to compute your overall credit score. Therefore, when you consolidate all your debt into the new loan, thereby leaving your old credit cards with no balances, this could immediately help to improve your credit.

Ensure you keep those credit cards open after transferring the balances to your debt consolidation loan, however. Closing out the cards decreases the overall credit you have available and will affect your credit utilization factor. While this seems counterintuitive, closing out those old cards in an attempt to manage debt will actually harm your overall credit score. However, be sure to put those cards away or cut up the plastic, because using them after you’ve consolidated your debt will also affect your credit utilization rate. Continue Reading