You might be struggling with multiple debts right now, and almost ready to opt for debt relief services. Maybe one of your friends or relatives has told you about its benefits, and you’ve made your decision based on his/her opinion. If so, then you’re certainly wrong.
Debt consolidation: How does it affect your credit rating?
Remember, the results may vary as the situation is not the same. The same method may not work for you. Today’s solution can create a different problem in another form in the future. Thus, you must understand how debt relief services help to get rid of debts. You should also analyze its impact on your credit score.
When multiple debts pile up, your credit score can drop. Missing monthly payments will be reflected in your credit report. However, there are many debt relief methods to get rid of those painful debts. Some of these methods can affect the credit score negatively.
Debt consolidation is one of the debt relief methods, which you can take help to start a fresh financial life. But, before you consider it, you must check its effect on your credit score.
Understanding debt consolidation methods
Debt consolidation allows you to combine your multiple debts into a single monthly payment. Thus, you can manage your multiple bills easily. You can consolidate your debts in many ways. You must choose according to your preference. But, before doing so, you have to be aware of the different ways to consolidate debt.
Debt consolidation program
You can consolidate your debts through a third party debt relief company by enrolling in a debt consolidation program. After enrolling in this program, you’ll be able to pay off the debts at a lower interest rate. You’ll also get complete professional guidance to repay your bills.
Consolidation loan
You can take out a personal loan at a lower interest rate from a bank to pay all your existing debts. Thus, you need to make one monthly payment to pay off the consolidation loan.
Balance transfer method
If multiple credit card debts are your concern, then you can consider balance transfer method. This strategy allows you to transfer all the high-interest debts to a low-interest rate credit card with the required credit limit.
How debt consolidation impacts your credit
Well, it mainly depends on the options you pick. So, whether you take out a consolidation loan or obtain a balance transfer credit card, a hard inquiry will be made on your credit reports. Thus, your score may drop to some extent.
Debt consolidation: Positive effects on credit score
Since you’re paying off all your accounts in full, your score will start improving. However, don’t expect immediate positive improvement just after you start paying off your bills with the help of consolidation.
1. Through a debt consolidation program, you’ll get a reduced interest rate on your debts. After paying some of your debts, you’ll see a positive listing on your credit report. Make sure, you’re now regular on your monthly payments and do not acquire new debts till you repay the existing ones.
2. If you’re making the payment on the new credit card (balance transfer card) on a regular basis, then you’ll be able to get a positive effect on your credit in the long run. You’ll see your credit score is increasing with time.
3. Debt consolidation is a better option than filing bankruptcy, the reason being bankruptcy will diminish your credit score by about 200 points. But, through debt consolidation, you’re paying the debts in full at a lower interest rate and managing your payments more sincerely. Thus, it will surely have a better effect on your credit score.
4. Taking out a loan for paying other debts can increase your credit rating thereby increasing your credit score.
Wondering how? See, suppose you have eight outstanding debts to pay off, which is reflecting you as a risky borrower to the creditors.
Once you’ repaying off those debts with the help of a consolidation loan, your credit report will show that you’re working on the defaulted accounts and paying off your debts. You need to be regular on making payments on the debt consolidation loan. Thus, your credit rating will improve gradually.
Debt consolidation: Negative effects on credit score
Well, the negative impacts will depend on some factors like:
1. Missing a payment is a big no-no in debt consolidation. If you don’t make the required payments regularly, then your score will take a dip.
2. Some debtors close their credit card accounts just after consolidating and paying off the bills. However, they shouldn’t do this. Why? The reason is, closing oldest accounts will shorten the credit history since 15% of your credit score depends on the length of your credit history.
3. Balance transfer method also impacts your score negatively. If you don’t pay off the full balance by the end of the introductory period, the interest rate will increase.
Is debt consolidation a good idea?
Handling debt consolidation in a proper way is highly recommended to get a positive result. But, before moving forward, you should be clear of these facts:
Make sure you know your credit score before considering balance transfer method. Having a poor credit score may not allow you for a 0% interest rate credit card.
Try not to avoid any monthly payments. Remember, borrowing money for paying off debts and again getting defaulted will land you in the same situation.
Get to know about the origination fees that come with personal loans. You may have to pay a balance transfer fee while opting for a 0% card. You’ll also have to pay a professional fee if you opt for a debt consolidation program. So, acquire knowledge about all the factors before taking a step forward.
Finally, your multiple accounts are due, which means you’re spending more than your means. Learn about good financial habits to avoid future debts and financial hassles.
Guest Article by Patricia Sanders
