Various forms of debt consolidation exist in the industry but the concept is all the same where you merge all your multiple debt payments into a single debt. If handled correctly, it can help you achieve financial freedom by relieving you of the heavy weight of overwhelming debt but if you don’t know the strategies that you should use to consolidate your debts, this might affect your credit score and also make you pay an amount that is more than what you actually owed on your credit card accounts? Among all the debt relief options, debt consolidation is touted to be the most popular one but if you’re not aware of the ways in which you should handle consolidation, you may end up in a mess. This article will give you additional facts and information regarding debt consolidation and its impact on your credit score.
Facts about debt consolidation
Debt consolidation, most commonly involves loans to pay off the sum of your other debts and this neither forgives your debt nor reduced it. However, it does help you manage your debts by rolling them into a single monthly payment. The new loan typically carries lower interest rates than what you were paying on your credit cards. Did you know that the credit reporting agencies issue credit scores to the consumers based on your credit history? The lending institutions use these scores to assess the level of risk on a loan or a new line of credit. Therefore, while you take out the debt consolidation loan, this will have a slight negative mark against you on your credit score.
The actual impact of debt consolidation on your credit score
affects your credit score in a positive way
. To the credit reporting agencies, paying off multiple accounts with a single loan might seem like you’ve already paid off your accounts. The loan appears as a new credit account but the accounts that have been paid in full will certainly appear positive. In repaying the new consolidation loan, it’s important for you to make consistent and timely payments. This step will always affect your credit score but that does take time. Don’t start using your other credit accounts as this is not recommended . First pay off your bills and then start using your credit responsibly.
The obvious benefits of taking out a debt consolidation loan
The most obvious benefits of a debt consolidation loan is the replacement of a multiple monthly payment schedule with a single outgoing payment schedule. You don’t have to split your monthly income among several creditors after you merge your payments into a debt consolidation loan. The simplicity and convenience of a single payment seems to be too enticing for a debtor who owes an overwhelmingly large amount on multiple credit cards. This means that your total payout towards your debt will be less through a debt consolidation loan than through multiple creditors.
Considerations while dealing with debt consolidation
If you start missing your payments on your debt consolidation or you make late payments, your credit score will plummet. Therefore it is very important that you remain fully committed to the loan. Closing your credit card accounts without notifying the companies also has a negative impact on your credit score even though if the move is to restrict further spending. If you really need to close certain credit accounts, you should close the recently opened ones.
There are some debtors who believe that debt consolidation is detrimental to their credit score as you’re admitting that there’s a problem with your finances. However, the opposite is actually true. As long as you keep on making timely payments on this new loan, your credit score will increase and will also help you resolve your debt problems.
Yasmine Wilson is a financial writer as well as a member of Debtcc community. She writes articles on financial topics such as debt, credit, investment, loan, and many more.