Debt Consolidation

Is Debt Consolidation Bad For Your Credit Score?

“A man in debt is so far a slave”

                                                                                                                 – Ralph Waldo Emerson

And maybe that’s why it’s always advisable to pay off your debts at the earliest! The more you wait, the huge your debt amount will be! The reason being, the high Annual Percentage Rates (APRs) along with applicable late fees and all!

And if you are overwhelmed with multiple debts, your situation can be worse! There are high chances that you have missed the due date of any one of your debts at least once!

You know, it’s quite normal! You are already stressed with the repayment of your debts. On top of that, these different due dates of your multiple debts!

It feels like an added burden! So, what can you do to eradicate this burden and pay off your debts?

Well, debt consolidation can be your solution! But at the same time, you might be worried about your credit score.

A drop in your credit score can hamper your creditworthiness in the future. Many creditors might not prefer you to lend money if you have a low credit score!

Then obviously, it’s a matter of concern! But do the debt consolidation methods hurt your credit score?

Find it right here! Let’s start!

Case 1: When you opt for a debt consolidation program

You can pay off your multiple debts through a single payment every month. And that too at reduced interest rates! For that, you need to approach a genuine debt consolidation company!

At first, the company will assess your financial condition along with your debt amount. Based on that, they will try to negotiate with your creditors to reduce the APRs of your debts.

Once your creditors agree, you can pay off your debts at reduced interest rates! And guess what?

You don’t need to remember any due dates of your debts. You have to make single payment to the consolidation company every month. And the consolidation company, in turn, will distribute the money among your creditors based on your debt amount!

And what about your credit score?

You don’t need to worry! If you go for debt consolidation, your creditors will mark your debts as “paid in full” in your credit report. So, most likely, your credit score won’t get hurt by opting for debt consolidation!

Case 2: When you opt for balance transfer method

Unsecured debts like credit card debts come with comparatively high APRs. And thereby making it very cumbersome to pay off. You can consider consolidating your credit card debt by opting for a balance transfer card!

You can pay off your high-interest credit card bills by transferring it to a new credit card. In this method, the new credit card ideally comes with a 0% APR.

Most of the balance transfer cards offer a 0% APR for an introductory period. Whereas, many balance transfer cards charge about 3% to 5% of the amount transferred as the balance transfer fee.

Currently, there are many balance transfer cards offering a 0% APR for about 15 months to 21 months. For example, Citi Simplicity Card, which has got a 0% APR for 21 months.

So, opting for this method, you can pay off your outstanding payable amount by the money you are saving on interest payments. It’s always better to pay off your outstanding amount as much as possible as the credit usage accounts for 30% of your credit score!

Paying off your credit card bills on time improves your credit utilization ratio too. Because, it’s the amount of credit you are using now, divided by the total available credit to you.

As a result, with the payment of your credit card bills on time by balance transfer method, credit score can get improved!

Case 3: When you opt for a consolidation loan

You can take out a personal loan from a credit union or a bank to consolidate your debts into a single one. But make sure that the loan should offer you a lower APR. It will help you to pay off your debt faster and with ease.

Let’s say, you have two credit cards with outstanding balance amounts of $6,000 and $4,500. And both the credit cards have the same APR of 25%.

If you take out a consolidation loan of $9,500 with a 20% APR, you can pay off both the credit cards. Moreover, your repayment plan becomes simple as you need to make a single payment every month to pay off your debts. And the biggest advantage is, you have to pay a lower interest!

Well, while applying for a consolidation loan, the inquiry on your credit report might cause a temporary drop in your credit score!

But let me tell you, it can improve your credit score in the long run! Paying off high credit card balances with a new loan can decrease your credit utilization ratio (the ratio of your outstanding balance amount to the credit limit).

And you might know that the credit utilization ratio accounts for 30% of your credit score! Always make sure to make payments on your new loan on time! Thereby it will help your credit score to rise slowly as your payment history improves!

As you can see, debt consolidation might hurt your credit score temporarily. But if you see, it helps to improve your credit score in the long run!

So, what are you waiting for?

Don’t let the debts burn a hole in your pocket. Opt for debt consolidation to pay off your debts faster and easier!

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