Debt consolidation and credit scores! Many are still confused as to how these two concepts work with each other. Is consolidating debts a bad choice when it comes to your credit scores? Let’s break it down!
Debt Consolidation and Credit Scores:
Debt consolidation means taking multiple loans and turning them all into one loan. You can also consolidate credit card debt. The idea behind consolidating your loans or credit card debt is that you pay off one big loan with the hope of minimizing cost. However, you need to consider the impact this can have on your credit.
So, what is a credit score? A credit score is a three-digit number generated by a mathematical algorithm using information in your credit report. Lenders use credit scores to determine who qualifies for a loan, the interest on a loan and the credit limit.
Debt Consolidation and Credit Scores – Positive or Negative?
Most commonly, consolidating your loans into one loan can have a better impact on your credit score in the long run. Basically, you use the money from a consolidation loan to pay off your credit card debt that is probably a high-interest bearing. Once you start paying off your debt, make sure you do not rack up any additional consumer debt. If this happens, the relationship between debt consolidation & credit scores can take a negative turn. Also make sure that your loan is worthwhile – meaning that you will be able to repay your loans in a timely manner with a reasonable interest rate. Otherwise, you could fall even deeper in debt.
Additionally, consolidating with a personal loan, you will see a significant reduction in your credit utilization ratio, which accounts for 30 percent of your credit score. Credit utilization is the amount you owe on your credit cards versus the total amount of credit available. Using less available credit will positively impact your score.
Don’t Ignore the Warning Signs:
As per what was explained above, debt consolidation seems to be the way to go. But hold up and make sure you do your research! Choose a consolidation company wisely to avoid a negative relationship between debt consolidation and credit scores. If the company you choose, pay your creditors late, you will end up damaging your credit anyway.
American Consumer Credit Counseling is a non-profit credit counseling agency that can assist you in getting rid of your debt with our debt management program.
If you are looking for a debt consolidation company, speak with a certified counselor at ACCC today! Call 800-769-3571.