There are a variety of factors that decide whether debit consolidation affects your credit score or not. It also depends on how pro-active you are as well.
What is Debt Consolidation?
To review, debt consolidation is essentially the process of taking multiple debts, typically unsecured and combining them into one secured debt. This is typically accomplished by obtaining a new loan secured by collateral and paying off the old unpaid sums with these funds. The new loan is typically at a lower interest rate because the new lender’s investment is protected by the collateral offered as security, making the loan less of a risk for the lender and therefore allowing for a lower interest rate. Additionally, the new lender can often purchase the current debt from the creditor at a discounted rate allowing them to benefit from those savings.
Debit Consolidation and Credit Scores
This having been said, when you take out a new loan and use it to pay off the old debts, the previous debtors will no longer report late payments to the credit bureaus and in fact, these should be listed as paid. In time this should improve your credit score.
Keep in mind however that this will not happen immediately and you will now have a new debt on your credit. However, the new debit will affect your credit score less adversely than being behind on your payments on the old ones. Additionally, if you make your payments on the consolidation consistently on time, your credit score will benefit from it.
Taking all of this into consideration, you may wish to follow your credit score carefully beginning a couple of months after the debts have been paid off with the new consolidation loan. The reason for this is, unfortunately, you may need to be in contact with the various creditors to be sure they are reporting accurately to the credit bureaus. If you credit history is not accurate, you can contact the credit bureaus and ask for an inquiry. They will then contact the various creditors and ask for an update. This can speed up the process of getting your credit score up to date showing the positive effects of the debit consolidation as soon as possible.
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Before you sign a debit consolidation loan there are certain things that you must know. A debt consolidation loan is a big step in a person’s life and should not be taken lightly.
Debit consolidations can come in really handy for people who are suffering under mountains of debt and aren’t able to see a way out. On the other hand these types of loans can also be a curse if they are not researched correctly.
Here are 3 things you need to know before you sign a debit consolidation loan.
1. Get the Lowest Rate You Can on the Debit Consolidation Loan
You should never just go with the first lender you visit for a loan. Just like anything else you need to shop around to find who will give you the best interest rate and the best total deal. Remember that you need to factor in fees as well as the interest rate to see which debt consolidation company can benefit you the most.
2. The Loan Has to Be At a Lower Interest Rate Then Current Rates You Are Paying
When looking for a debit consolidation loan you need to make sure that the interest rate you will be receiving is lower than what the current rate on your debt is. If the rate is not lower there is no point in taking the loan. If you have several different debts that you are trying to consolidate look at the average rate you are paying to compare to the loan’s rate. Never sign a debt consolidation loan that is the same interest rate or higher than what you are paying now. You will end up paying a lot more money in the long run.
3. Research a Debt Consolidation Company before Signing at the X
You should always do your research on the actual company before signing the loan papers. Check with the Better Business Bureau to see if they have any complaints against them. Check online to see if anyone has posted negative reviews about the company. If you find some things that make you question the integrity and professionalism of the debt consolidation company, go with your gut and don’t sign any papers with them. You need to make sure that you work with a company that will treat you with respect and get results.
Even though this may sound like it takes a lot of work you need to make sure that you are getting the best possible debit consolidation loan for you. Otherwise you may end up regretting your decision and be in worse financial shape than before you signed your loan papers.