Debt consolidation is one of many approaches to helping to
manage overwhelming debt. When used properly, it can not
only help you cope with high debt, it can even be the first
step in financial recovery and a debt-free lifestyle.
There's one other thing you might not know about debt
consolidation. It can actually help your credit score.
Debt consolidation is not the same thing as debt
settlement, debt management, or bankruptcy. Debt
consolidation actually sounds counter-intuitive. To
consolidate your debts, you roll all of your debts together
and then take out a giant loan to pay off the individual
debts. In a sense, you exchange many smaller debts for one
colossal debt.
So how does that help? It helps if you happen to have a lot
of debts at higher interest rates that you can consolidate
or re-package in a loan at a lower interest rate. For
instance, if you take a bunch of credit card debts at rates
of 16% to 20% and beyond and consolidate them in a loan for
10%, that translates into paying less every month.
Even better (for debt-free thinking) you can pay the same
amount you were already used to paying but because interest
rates are lower, you're knocking out more of the principal
with each payment. Bottom line: your debt gets paid faster.
If you own a home, you can refinance your home and possibly
re-package those debts at a very favorable, mortgage-type
single-digit interest rate.
Debt consolidation is not for everyone. Not everyone can
qualify; if your credit is already battered, you may not be
able to get another loan, much less a big one. Debt
consolidation is easier if you own a house, but that's not
required. However, there are people who will simply not be
able to swing it.
But if you can consolidate your debt and you're considering
that versus other financial options, you need to know that
most debt settlement plans and certainly bankruptcy will
leave a bad mark on your credit report.
Debt consolidation can help it.
Here's how. Your credit score is actually a fluctuating
number that is maintained by three main organizations:
Experian, EquiFax, and TransUnion. All of these companies
have a formula for your credit score and each formula is a
little bit different. However, they all arrive at a number
(your score) based on a variety of factors.
One factor is how well you pay off the debt you have. This
score is very heavily weighted, making up about a third of
your overall score. It looks at whether you pay your debt
on time or late and if you make payments or flake out.
If you consolidate your debt you take out one new loan and
then pay off a bunch of smaller loans. This hits your
credit score favorably: you have paid off some
loans….probably earlier than required. That's a good thing.
A consolidated debt should also make paperwork at your
house a lot easier. Instead of having to receive and write
checks for a dozen or more bills a month, you have fewer
debts (although it's much bigger). This reduces the
likelihood of late payments or missed bills. That also can
help your credit score.
Another important factor weighed in your credit score is
how much credit you have available to you versus how much
you are currently using. Being maxed out everywhere is bad
for your credit score. If you have credit but aren't
inclined to use every bit extended to you, that helps your
score.
If you consolidate your debt, you immediately pay off a
bunch of debts. If those debts are credit cards, for
instance, you still have available credit. In fact, you're
just increased your available credit by paying off the
card. That counts in your favor, too.
Last but not least, the philosophy behind debt
consolidation is one of re-organizing or re-structuring
debt, not simply trying to walk away from it or get a court
to force creditors to write it off. Although it may not be
called debt consolidation when businesses do it, large
companies frequently have to re-structure debt to operate
more efficiently. It is a standard business practice, one
that makes good financial sense, and its primary purpose is
to be sure that all creditors are paid in full according to
the terms of the loan.
In other words, debt consolidation preserves your good name
and your integrity. If you consolidate your debt, you
credit report does not suffer. In fact, the credit report
people may not even really know that you're consolidating
debt. As long as you pay off what you owe, how you manage
your money is your business.
Most other debt plans immediately go on your credit report.
If you've tried to negotiate or settle a debt (work out a
plan to pay less), expect that to get reported. Businesses
want to warn each other that you might be the kind of
person to make charges and try to find a way not to pay
according to the terms you agreed to.
Bankruptcy is even worse on your credit report. It can be
reported to future creditors for seven to ten years after
the event. Many potential lenders won't extend credit to
you if you have a recent bankruptcy and even those who will
may be very meager and demand exorbitant interest. After
all, you're now a "high risk" borrower.
The good news for everyone is that the credit score is a
moving target. It changes constantly and no one event,
whether it's a late payment or a bankruptcy, will affect
your credit score forever. The credit score is also a
composite picture of how well you handle money versus how
poorly you handle it. Do enough good things with your money
and your credit will improve, even if you've made mistakes
in the past.
Here are some general rules of thumb for a good credit
score: • You must have and use credit. A person who has
never taken out a loan or paid off a debt can be the most
reliable person in the world but he'll have trouble getting
a loan. • However, you should have more credit at your
disposal than you actually use. Maxing out is not a good
thing. • Pay your bills on time and don't miss payments. •
Don't default on a loan, skip out on paying a debt, or go
into a program that tries to settle or negotiate your debt.
This gets reported. • Avoid bankruptcy, if possible. This
is not always possible, but view bankruptcy as a last-ditch
solution not a first choice.
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Need to know more about debt consolidation? Visit
http://www.debt-consolidation-diva.com for lots of straight
talk about debt consolidation. Debt consolidation is not
suitable for everyone and some people won't qualify for it,
but for those who do, it can be a great solution for
managing overwhelming debt. Judy Kuhns contributes to
Debt-Consolidation-Diva and other sites.
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