Bankrate Shares Expert Consolidation Advice
Bankrate shares some expert advice regarding debt consolidation and credit ratings via their professional debt advisor, Steve Bucci:
Wondering if debt consolidation will make a dent in your credit rating? In short, the answer is yes and here’s why:
By moving credit card balances into one installment loan to consolidate debt, a new inquiry is being created on your credit report and a large installment loan will now show up as well. Potential new lenders will then have to consider the credit score incorporated with the potential of you having to add to your credit card balances once again and since many people have to do so is why debt consolidation temporarily brings down one’s credit rating.
Keep in mind that there is a difference between a credit rating and a credit score. A credit score comes from those items that are reported one’s credit file to determine if a person is more or less likely to default on their next loan. A credit rating is assigned based on job stability, income and other similar factors to determine whether or not a person is creditworthy.
Focusing on financial health in general instead of merely a credit score or rating is key. It’s possible to have a decent credit score, for example, and still be thousands of dollars in debt. If you have a large amount of credit card debt, ask yourself how you got in that position and examine your financial habits. Look toward establishing a savings account with money set aside for the future. A good rating and score will be reflected if one is living in a financially responsible way.
- Takes your existing debt and try to settle with your creditors for a lower amount. If you pay off the settled amount, your debt will be considered paid in full.
- Negotiates with your creditors on your behalf.
- Fee based on a percentage of your total starting debt or a percentage of the debt they save you.
- Most settlement companies have you create a separate "escrow" account where you will make monthly contributions over a certain amount of time to contribute to your settlement. Once there is a substantial amount of funds to show your creditors, the settlement company will try to negotiate a lower amount of debt.
- Combines all your debts and creditors into one monthly payment.
- Allows you to pay one monthly payment to the consolidation company, instead of multiple payments to different creditors.
- You no longer owe your original creditors; instead you pay one monthly payment to your consolidation company.
- Consolidation companies can help negotiate lower interest rates on your debts and help lower your total debt payment in the long run. A lower interest rate will lower the amount you owe in the end.
- Allows you to consolidate all your different debts into one personal loan that can be paid off over time.
- Can offer borrowers a lower interest rate with a longer payback term (compared to high-interest credit cards or medical bills). This will lower the amount of money required to pay off the loan over time.
- Personal loan debt consolidation can be an effective way to raise your credit score quickly (within 3-6 months).
- Borrowers can receive funds from their loan within only a few days.
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