Three Effects of Debt Consolidation - What It Can Do For Your Credit Score

Debt consolidation is basically a kind of debt refinancing which involves taking out a single loan to repay several others. This commonly refers to an individual finance method of people dealing with high consumer debt, sometimes it may even refer to the financial strategy of a country addressing its budget deficit, but more often it tends to be used to refinance Government debt or corporate debt. This type of debt consolidation mainly serves to reduce interest costs and monthly payments, while potentially increasing credit scores. There are several advantages of consolidating debts as follows. They may vary depending on the individual situation of each person, some of them being:

o To consolidate debt, you do not need to have bad credit. A debtor with bad credit will always have a higher interest rate compared to an individual with good credit. However, to consolidate debt does not necessarily mean you have to consolidate all your loans. You can consolidate debt that already exists into another loan. When you refinance debt, you are able to get lower rates of interest and payments.

o If you have lots of credit card debt, consolidating it into one loan can help you manage your payments. The interest rate for debt consolidation is lower than the combined interest rates of all your credit card payments put together. This is because the consolidated amount is at a much lower value, thus making it easier to repay. However, this benefit may not always be a good option, since those with a lot of credit card debt may already be paying too high of a rate. Some may be able to use debt consolidation as a good option for debt settlement, since they can lower their payments to an amount that they can afford.

o Consolidate debt consolidation loans allow you to save money by combining existing loans into one monthly payment without taking out another loan. By taking out a new loan, you will probably have to give up some of the benefits of debt consolidation loans. However, you do not have to pay interest on the loan while you are in it. This means you will be able to reduce the amount of money you have to pay out monthly. The longer you are able to make your payments, the more money you will be able to save in the long run.

o Debt consolidation programs have a negative credit impact. When you consolidate debts, some of the credits that were negatively impacted during debt settlement programs may be included. This means you may have to take out a new loan to pay for the debt consolidation loans. The negative credit impact may be transferred over to the new loan though. However, you will not be able to eliminate any of your debts when you take out a new loan, making debt settlement programs a better option overall.

o There is some positive credit impact when you use debt consolidation programs. You may have to start paying less each month because you have fewer balances to repay. However, since the consolidation company will take care of paying off your oldest debts, you will not have to worry about repaying new loans. You will just have to repay the consolidation loan. The positive credit impact of this is not much, however.

o A third effect of debt consolidation is when your lender sells some of your assets to pay down your loan. If your lender does not use the proceeds to payoff your loan, you could lose some of your assets. This can be bad for your credit rating and can hurt you when you apply for future credit. For example, if you want to buy a house in the near future, you may not qualify. This is why you want to avoid a sale of assets to payoff a debt consolidation loan by your lender or a debt settlement program.

These three effects of debt consolidation may mean that it is a good idea to consider consolidating debt. However, you should know that consolidating debt does not always improve your credit score. You should still pay your monthly bills on time and you may have to sacrifice a few things in order to save money and improve your credit score.

Last updated