How Consolidation Affects Your Credit ScoreDebt Consolidation
Debt consolidation is becoming an increasingly popular way to manage debt in these trying financial times. No Debt Today can help you survive this economic turmoil by matching you with an experienced consolidation service. Consolidation is the process of bringing multiple debts and financial obligations together under one "roof" to achieve a more manageable monthly payment. Debt consolidation can come in many forms. In one consolidation method, debtors take out a personal loan for the amount of their existing debts and then pay off their balances with the new loan. Alternatively, consumers may also consolidate debt through a professional company. Professional debt consolidation companies provide loans after speaking with your lenders and confirming payoff amounts with them. Usually, the accounts included in the consolidation will be closed or canceled so that you can no longer access them. Regardless of whether your credit card accounts are closed, you will likely be counseled to stop using them and to refrain from opening any new credit card accounts.
The Slightly Positive Effect - Doing it Right
Whether your debt consolidation is handled by a professional consolidation company or if you do it yourself by taking out another loan, home equity line of credit, or credit card, consolidation will give your credit score a mild bounce initially. As your debts are paid off with the money you get from the new loan or credit card, your utilization rate - the amount of debt you actually have relative to your total credit- will go down. For example, if you have a credit card with a $5,000 limit and you have the card maxed out before the consolidation, it is at 100% utilization - not good. However, when you pay off that credit card as a part of your consolidation, it will hit 0% utilization, which is great for your credit score. If you leave the account open and do not use the credit card any longer (until you have gotten your debt back under control by paying off the consolidation loan), the overall effect of your consolidation will be a positive one. Selecting a reputable consolidation service can help you go about this process the right way, which is another reason to choose No Debt Today for a referral to a knowledgeable consolidation service.
The Profoundly Negative Effect - Doing it Wrong
If you secure a consolidation loan or work with a professional consolidation company to pay off the debts that you were struggling with and then begin charging expenses on those cards while you still have your new consolidation debt, you are, in effect, doubling your debt! This has a horrific effect on your utilization rate and will cause your credit score to plummet. Your debt-to-income ratio will rise, and you will find yourself struggling with the same issues and problems that you had before. One of the wisest things you can do after obtaining a debt consolidation loan is to pay off your old debts as planned and, if they were credit cards, leave those accounts open and unused for a while until you have paid off the consolidation loan. Next, start closing down a few of the accounts so you are not penalized for having too much credit open at once. If you would like more information on how debt consolidation influences your credit score, No Debt Today can help by referring you to one of our trusted consolidation partners.