Smart With Finances: This Is How Debt Consolidation Will Affect Your Credit Score

Men and women looking for debt relief often hear debt consolidation is a great way to achieve this goal. Companies offering this service claim consolidating one’s debt saves money and boosts your credit score. However, care must be taken when this option is used, as people can and do make mistakes that end up hurting them in the long run.

How Does This Process Work?
With debt consolidation, a person takes out a new loan to cover all existing debts. This type of loan is a personal loan just like other personal loans. The term debt consolidation loan only refers to what the money can be used for. Choosing this option rather than a balance-transfer credit card or home equity loan usually makes sense. The interest rates tend to be lower and no collateral is required, as it is for the home equity loan option. Once the funds from the loan have been obtained, the debtor pays all of his existing debts. To learn more about how this works, check out today.

The Benefits of Debt Consolidation
When a person obtains a debt consolidation loan, they often find they get an interest rate that is lower than what they are currently paying. The monthly payment may decrease, and the borrower only has one payment to make each month. This is of great help to many, as missing a single payment on the debt could lead to late payment fees, penalties, and more. The risk of accidentally missing a payment one month declines significantly when only one debt payment must be made. Furthermore, consolidating debt can lead to a boost in the person’s credit score.

Debt Consolidation and Your Credit Score
Debtors often find consolidating their debt has a positive effect on their credit score, but this isn’t always the case. Men and women need to know what to expect when taking this step to ensure they don’t make mistakes. First, a debt consolidation loan that is paid on time each month demonstrates the individual’s creditworthiness. Additionally, the loan lowers the person’s credit utilization score, which is of great importance. Credit utilization plays a large role in a person’s score, and many credit cards close to their limit reduce the score considerably. Consolidating the loans reduces credit utilization and provides the debtor with a much-needed boost in the credit score. However, debtors must make certain they don’t make mistakes when obtaining this loan.

Don’t close credit card accounts once the balance is paid. Doing so negatively affects the credit score because the age of the credit history factors into the score along with the credit mix. While these don’t have the same weight as credit utilization, they are considered when the credit score is determined. Furthermore, closing the accounts increases the utilization ratio and this is never good for the score.

Debtors need to resolve to not take on new debt until the consolidation loan is paid in full. This is where many people go wrong. They have empty credit cards and say they will only use them once. Before they know it, the balance is high once again and they now have a credit card balance to pay along with a debt consolidation loan. This negatively impacts the credit score. Use debt wisely at all times. A debt consolidation loan may be of great help in providing debt relief so long as no new debt is acquired. Keep this in mind when determining if this is the right option for your needs and situation.

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