Will Debt Consolidation Damage Your Credit Score? What you need to know
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If you want to cut or simplify your monthly debt payments, debt consolidation might be for you. It can help you organize your finances and pay off debts. With debt consolidation, you can consolidate all of your debts into a single payment so that you don’t have to worry about multiple payments, interest rates, and due dates.
Like any other financial strategy, debt consolidation is not for everyone. Here is what you need to know about debt consolidation and how it affects your credit score.
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How Does Debt Consolidation Work?
In debt consolidation, you bundle multiple debts into one manageable payment, ideally with a lower interest rate. It can help you simplify the debt repayment process and save on interest. ONE Debt Consolidation Loans is a kind of personal loan.
If you are overwhelmed with multiple debts, such as: For example, outstanding credit card balances, medical bills, or tax debts, debt consolidation can be a good solution. You don’t have to keep track of different payments and interest rates, and you can settle your debts with less confusion.
Debt Consolidation Options
There are several ways you can consolidate debt, including:
- Private loan – You can take out a personal loan with a lower interest rate than all or most of your other debts and use the funds to pay off your debts. Many financial institutions – such as banks, credit unions, and online lenders – offer debt consolidation loans.
- Credit from friends and family – When you have a loved one with some extra cash, you can ask them for a loan at a low interest rate. You can use the money to pay off your debt and repay your family member or friend with one monthly payment. Just make sure the repayment schedule is in writing so everyone is on the same page.
- Credit card for credit transfer – As soon as you open a balance transfer card, you transfer your current credit card debt to it. In most cases, the credit transfer card is delivered at a promotional price of 0% of the APR. If you repay your debts in full during the promotional period, you can avoid interest charges. Otherwise, you will have to pay the remaining balance at the regular interest rate on the card. You generally need good to excellent credit to qualify for an introductory APR of 0%.
- Home Equity Loans or HELOC – ONE Home equity loan or Home Equity Line of Credit (HELOC) allows you to borrow money that is secured by your home. It can give you the money you need to pay off high interest debt at a lower interest rate. But if you don’t pay it back, your lender can foreclose your home.
- Automatic refinancing with payout – When you have equity in your vehicle, a cash-out auto refinance will replace your current car loan with a new, larger one – you can use the difference to pay off your debts. To be eligible for automatic refinancing with payout, your vehicle must be worth more than the remaining balance on your car loan.
- Retirement provision – If you have a retirement account like a 401 (k), you can withdraw money from it to help consolidate the debt. You pay the interest to yourself, and the loan payments usually come from your paycheck. Remember that once you withdraw money from your retirement account, you lose the power of compound interest. And if you don’t pay back the loan, you can put a tax bill on the amount you withdrew from your retirement account.
How Debt Consolidation Can Affect Your Credit Score
Debt consolidation can have both positive and negative effects on your credit score.
- Hard inquiries can lower your credit score. When you apply for a credit transfer card or Debt Consolidation Personal Loans, the lender will carry out a tough query on your credit. This can cause your creditworthiness to suffer temporarily.
- Your average credit age goes down. As your credit accounts age and have a track record of making payments on time, your credit score is likely to improve. Opening a new account will lower your average account age, which in turn could lower your credit score.
- Your credit mix will be more diverse. Your credit mix relates to the types of accounts you have, such as credit cards, loans, or mortgages. Since lenders prefer a variety of accounts, opening a new credit card or personal loan can improve your credit score.
- You lower your credit utilization. Your loan utilization rate is the amount of revolving loan that you are using divided by the amount of revolving loan that you have available. Since a new debt consolidation account can increase your available credit, it can lower your rate and improve your credit score.
- On-time payments can improve your payment history. If you pay your new debt consolidation loan on time, your credit rating will gradually improve. Payment history is the most important factor in determining your credit score, so make sure you don’t miss any payments.
When it makes sense to consolidate your debt
Debt consolidation is not for everyone, but it is a great option if you are currently struggling to keep up with monthly payments. If you can get a lower interest rate than your current debt, you can save hundreds to thousands of dollars in interest over the life of your loan. However, if your repayment period is significantly longer, you may still end up paying more interest. Take these factors into account before you consolidate your debt.
Debt consolidation can also be worthwhile if you know you can stick to your budget in the future. If you use a debt consolidation loan to settle your debts but immediately start piling up credit card debt, you are stuck in the same cycle again.
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How to get started
If you do decide to move on to debt consolidation, make sure you check your credit history first so you know where you stand and what types of loans and credit cards you may qualify for. Then make a list of all the debts that you want to consolidate.
Next, consider which route you would like to take towards debt consolidation. Take a look around and compare all of your options to find the best prices. After choosing the right path for your situation, make sure that your payments are made on time.
Alternatives to Debt Consolidation Loans
If a debt consolidation loan isn’t for you, there are other options that you can turn to.
- Create a budget – Sometimes the easiest way to pay off debts is to create a budget and stick to it. You can choose from many different budget types to suit your needs.
- DIY debt settlement strategies – You can use the debt snowball or the debt avalanche method to pay off debt on your own. While the debt snowball method focuses on paying your smallest debts first, the debt avalanche strategy aims to help you save the most on interest by paying your debts at the highest interest rate first.
- Debt settlement – Debt settlement is when you negotiate with your creditors to pay less than you owe. You can negotiate yourself or you can hire a professional debt settlement company to do it on your behalf. Be aware, however, that paying off debt can affect your creditworthiness.
- Debt Management Plans – Debt management plans are offered by credit counseling agencies and are designed to help people with lots of unsecured debts. A credit advisor negotiates interest rates, monthly payments, or fees with your creditors. Once it does, you make a payment to the credit advisory company, which will use the money to pay your creditors. Debt management plans can also adversely affect your creditworthiness if you change the terms of your agreements with creditors.
When you have decided to use a debt consolidation personal loan, visit Credible To Compare personal loan rates.