Debt consolidation, like all the other debt relief strategies, will have an effect on your finances. No matter what you choose, going through the process of paying off debt will change your financial position forever. Let’s talk about how to consolidate credit card debt without hurting your credit score.
One of the things that can be affected is your credit score. Most of the debt relief options can shake your credit ratings from where it currently stands. This is why it is very important that you understand the debt solution that you will choose to solve your credit issues. If you choose the wrong strategy, you could end up wasting your time, money, and effort as you get out of debt.
Admittedly, getting out of a high credit balance is hard to do. It is also not something that you can accomplish overnight. Unless you won the lottery or someone gave you a huge cash gift, it is next to impossible to get rid of debt overnight. You have to accept that paying off your credit card debt completely will take at least a couple of months to finish. The higher the balance, the longer it will take for you to be completely free of debt.
So if you are thinking about consolidating your multiple credit card debts, you need to consider a couple of things first.
How does debt consolidation affect your credit score?
If you are concerned about the effect of debt consolidation on your credit score, that would depend on how you choose to consolidate your debt.
For instance, if you chose Debt Management to consolidate debt, you can rest assure that your credit score will not be harmed. However, that does not mean your credit report will not be affected. It will indicate that you are currently enrolled in a DMP. Not only that, your credit accounts will be frozen. You cannot open new credit accounts while completing this program. The good news is, this plan will help you increase your credit score. At least, this is true if follow through with the Debt Management Plan that the credit counselor will help you create. If you mess it up, you could be back where you started with all your credit card debts.
When it comes to debt consolidation loans, the hard inquiry that the lender will make on your credit report could reflect badly on your score. If you apply for a new loan with various lenders, that can bring your score down. But if you commit to making on-time payments, you can quickly recover your score. In fact, you can even make it go higher. The good thing about this option is, it will not leave a mark on your credit report. This is true regardless if you borrow a personal loan or a home equity loan.
If you choose balance transfer cards, the inquiry that the creditor will make could dip your credit slightly – but then again, it should be easy to recover that. Since this form of consolidation lets you enjoy a couple of months of low to 0% interest rates, you can aggressively pay off your debts without worrying about high finance charges. All your payments will be credited towards the principal debt – which is a good thing as it will help lower your balance significantly. This will improve your credit utilization rate and in effect, your credit score.
When it makes sense to consolidate credit card debt
Before you choose to consolidate credit card debt, it is important that you understand if it is the right option. There are certain signs that will tell you if consolidating credit card debt is okay. Here are some of them.
- If you want to organize your debt payments. The primary effect of consolidating debt is to help you organize your multiple credit card accounts. Sometimes, all you really need is a debt relief program that will allow you to group your debt together so you can monitor it more effectively.
- If you can afford to pay off your credit card balance. Most of the time, consolidation is all about restructuring your debt payments. It does not reduce your balance. If your income can support your debt payments, then consolidating debt, even without reducing the balance, should be enough to solve your credit issue. Of course, that means you should have the income that can support your payments.
- If you have a stable income. The truth is, it is not enough that you have an income. You need to have a stable source of income. Most of the debt consolidation options will require this. You cannot apply for a new loan or a credit card if you cannot show proof that you have a stable source of income. After all, the lender or creditor want to be assured that you can afford to pay the debt you owe. In case you enroll in a Debt Management Plan, this is also important. The credit counselor will find it hard to recommend you into the program if you do not have a stable income.
- If you do not have the time to monitor all your accounts. Another valid reason to consolidate credit card debt is when you are too busy to monitor all your accounts. We all have a lot of things going on in our lives. Monitoring multiple credit accounts will make things harder. It will either cause you a great deal of stress or it can cause you to miss out on one or more payments. If you know that your schedule will not permit you to monitor your credit accounts, then just consolidate to make things easier.
- If you want to improve your credit score. Most of the time, consolidating debt will affect your credit report. Depending on the specific situation you are in, you could end up lowering your credit score. The good news is, debt consolidation can usually bring it back up. The dip in your score is only temporary – it will improve as long as you follow the rules of your chosen debt consolidation plan.
In case you can relate to one or two of these situations, then you can look further into debt consolidation as an option to solve your credit problems. If you are still unsure, you can get help from a debt expert. Check with us if you qualify for debt consolidation by visiting our website and talking to one of our trained debt experts. The initial consultation is free. We will help enlighten you about various financial truths so you can make a smart decision about your debt situation.
When it does not make sense to consolidate credit card debt
While debt consolidation is a legitimate way to get out of debt, it is not always ideal for all situations. There are various reasons why consolidating credit card debt should not be done. Here are some of them.
- If you fail to identify the reason why you are in debt. Consolidating debt will not solve the root cause of the problem. It will only treat the symptoms so you can feel better. Remember that you only restructured your debts. You still have to pay it off. Unfortunately, some people think that after consolidating, the worst of the problem is over. It is not. You still have a long journey ahead before you can call yourself completely debt free. You may want to think about what caused you to be in debt in the first place. This will help you stay away from another debt pit in the future.
- If you cannot get a lower interest rate. It is not advised that you focus on the interest rate alone. However, it should be a huge influence on your decision to consolidate or not. A low-interest rate will help you save money on your debt payments. If the consolidation will end up giving you a higher interest rate, then it does not make sense to consolidate. At least, not yet. Figure out why you are having a hard time getting a low-interest rate. Once you have addressed the situation, you can probably work on consolidating your debts again.
- If your main concern is lowering your monthly payments. There is nothing wrong with wanting to lower your monthly payments – but that depends on what you intend to do with the extra money. First of all, you have to realize that lowering your monthly payments will stretch your repayment period. Even if you end up with a lower interest rate, this will cost you more in the long run. Aside from that, you need to seriously think about why you want your monthly budget to have some breathing space. If it is to help you spend more – make sure this will only be used on the bare basic necessities. In case the breathing space will be used on unnecessary expenses like an unplanned vacation or a shopping spree, then consolidating does not make sense. This line of thinking will land you in more debt.
- If you do not understand the rules of the new loan. Finally, you should not consolidate debt if you do not understand how to do it. Whether you planned to consolidate through a loan, a balance transfer card or a credit counselor, make sure you know what you are getting yourself into. Knowledge is the best defense against making a mistake in your finances.
It is important that you define the reasons why you should or should not consolidate your credit card debt. If you fail to make the right decision, you could end up wasting a lot of money and your time and effort as well. That can lead you to more debt and in effect, a lower credit rating.
What is the best credit card debt consolidation that will not affect credit?
There are several options when it comes to consolidating credit card debt. If you are concerned about your credit score, you would naturally want to choose the option that will help you take care of it while you pay off your debt.
Earlier in this article, we discussed how the different consolidation options can affect your credit score. If you noticed, all of them can affect your credit report in one way or the other. You need to look into your financial needs before you decide which of the options you will choose.
If you do not mind having your credit account frozen for a certain period, then Debt Management is a great option for you. The great thing about this option is it will not require you to borrow or shift your money from one lender to the next. The credit counselor assigned to you will negotiate with your creditors to help make your monthly payments manageable and more affordable. That could help you save a lot of money if you create the right debt management plan.
In case you currently have a good credit score or you have collateral, you can opt for debt consolidation loan. If you are sure that you can get a low-interest rate on the loan, then this is a good option for you. Of course, you need to be ready because your credit score will dip as the lender conducts a hard inquiry on your credit report and that small timeframe when your debt will bloat. After all, it will take some time before the new loan can arrange to pay off all your other debts. All of these will cause your credit score to go down. If you do not mind having it go down, then go ahead with a debt consolidation loan.
Make sure you consider all of these before you make your decision. For some experts, choosing the right debt consolidation option is already half of the battle towards debt freedom. This is why you are encouraged to scrutinize each and every option that you have. Thankfully, there are sites like toptenreviews on debt consolidation that you can turn to for information.
What to do after consolidating credit card debt
You have to keep in mind that consolidating credit card debt is only the beginning. You still have a long way to go to completely pay off your debts. To help make things easier, here are some tips that you need to remember.
- Identify the root cause. Consolidating debt will only restructure your payments so you will find it easier to completely pay off what you owe. However, this does not address the reason why you were in debt in the first place. If you fail to address the root cause, all your debt payments may not be enough to solve your credit issues. For instance, if you got into so much credit card debt because you could not control your spending, then you need to solve that. Otherwise, you might end up adding more to your debt before you can even solve your current situation.
- Do not give in to a false sense of complacency. Since consolidating your multiple credit card debts will make things look easier and more organized, some people mistakenly assume that they have solved the problem. This is not true. Do not feel complacent about your debts because you still have a long way to go in terms of payments. You have yet to pay off what you owe.
- Stop borrowing money. If you really want to get out of debt fast, you need to stop borrowing money for now. This is the only way that you can lower your credit utilization rate. If you want to improve your credit score, this is what you should do after you consolidate your debts.
- Create a new budget plan. Finally, you need to create a new budget plan that will incorporate the changes that you have made towards your debts. Make sure you allocate funds for your debt payments. That way, you can be sure that you will not miss out on a payment.
Remember that consolidating credit card debt may affect your credit report but that does not have to be permanent. You can improve your credit by sticking to the terms of your new repayment plan. Make sure that you pay your dues on time and you keep a lid on your spending. That should help you get out of debt and, at the same time, give your credit score a boost.