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Is Debt Consolidation Helping or Hurting Your Credit?

If you are going through problems with your debt such as failing to meet minimum payments, dealing with missing due dates, or not being able to make considerable progress in the process, it is very likely your credit score highly reflects this and your situation. These numbers are not any old numbers and play a major role with presenting your health financially as well as your ability to pay creditors. If you are looking to regain solid footing, your best option would be debt consolidation. However, before you begin it is important you know exactly how this can change your credit score and worthiness. The question you need to ask yourself is will debt consolidation help your credit or hurt it? Read on and discover the different factors this highly depends on.

Types of Debt Consolidation to Consider

The simple standard that is behind debt consolidation is taking debts and merging them into one. This will hopefully give you more manageable debt with many different ways you can go about it. If you go for debt consolidation via a bank or debt relief company, this normally involves third party discussions for lower rates or payments on your behalf. Sometimes, this way can take advantage of relationships that have already been established with creditors. If you are having problems with credit card debt, this debt can easily be combined through balance transfers onto a brand new card with a 0% or low APR throughout the preliminary period.

You can also get debt consolidation via your mortgage lender, which is knows as a home equity line of credit (HELOC). With this type of debt consolidation, you use your home as insurance and are allowed to borrow money and pay off your debts. The advantage of this type of debt consolidation is you would be paying the lump sum at a lower rate than that expected by your credit card company. The disadvantage; however, is your home is on the line in the event you fail to make the payment. These types of debt consolidation can affect your credit in a number of ways, including:

  • Credit utilization
  • Past credit history
  • Declaring bankruptcy

Credit Utilization

When you consider your risk levels for borrowing as well as your credit score, the major factor is the amount of credit you currently have available that you are presently using.  You may have sufficient amount in your credit card, most of which has been charged, in which case this won’t be good news to a potential lender. However, if you wish to prove your score, you may want to transfer your balance from your old card onto a new card. In this process, all other cards must remain open as the amount that is available to you will be raised with the amount being charged remaining the same. However, if you choose to close all old cards once you have opened the new one, you will actually be lowering the credit available.

In relation with debt consolidation loans from third parties, effects on your credit can increase if the creditor is considering any of the following:

  • Credit rating
  • Credit score

The credit rating will then bring out the many issues that are disturbing your credit worthiness. Such loans may affect your credit rating and cause it to suffer as you may now be allowed to rack up debt again on your credit cards that are now debt-free. This could potentially lead to a higher utilization amount. Additionally, in line with agreement, such parties could ask you to close all credit cards that are open, which would also have an effect on the credit score.

Past Credit History

Whether you choose HELOC or a balance transfer, a major factor that will be used to determine your credit value is your past credit history. If your credit history consists of many late or missed payments and you choose to request a line of credit or apply for another credit card, creditors may see think you are taking further risks than they would like. However, if you are unsure about your credit history, it is vital you regularly check out reports from any of the following credit reporting agencies:

  • TransUnion
  • Experian
  • Equifax

Such agencies usually entitle you to an annual free report.

Declaring Bankruptcy

Declaring bankruptcy and debt consolidation are two different things, but possible lenders may notice third party debt consolidations as new creditors, therefore it would bring both on the same lines. Additionally, after undergoing the consolidation process, if your debt has been lowered, this could be reported as a charge-off, which could potentially hurt your credit score in the future.

Bottom Line

Before going into any types of consolidation regarding debt, it is important to do enough research and relate this to the situation you are in. some options can help you better than others so be sure to do some thorough research!