Debt consolidation is also termed credit consolidation and it is a method for merging several debts into one lower-interest debt. This is many times done when you have incurred several high-interest debts such as credit card bills and personal loans. Debt consolidation will lower the monthly payments partially by raising the time for repayment. It will help in making your credit more manageable and organized. Significant debts are likely to get overwhelming and when it appears as if you are sinking, debt consolidation can be life-preserving. You need to consider certain aspects though. Let’s check them out before arriving at a decision.
Effect of debt consolidation on credit score
- Payment on time: Due to the lowered monthly payment of consolidated loans, you will find it easier to make your repayments on time. This helps improve your credit score.
- Developing a credit inquiry: A lot of inquiries can shave off some points from the credit score. It will also result in lenders believing that you are relying on the borrowed money too heavily.
- Loss of account history: Credit length and payment history account for around half of the overall credit score. Closure of these accounts means loss of valuable history that may affect the credit score.
- Opening new lines of credit: When the credit score has several debts apart from the consolidated account, and if you add another one to this blend, it will cost you. Lots of lines of credit can result in a drop in credit score.
Some other considerations
- Overall costs over time: The consolidated loan means smaller monthly payments but more money spent over time. If you can meet individual payments it will be a good idea to save money.
- Consolidation loan terms: The loan interest rate for the consolidated loan has to be lower than the normal interest on other loans. In case you feel that you are unable to make the repayment even with the consolidated terms it is not worth it.
- Selecting the right lender: Perform thorough research before opting for a place for consolidation. Many lenders will offer enticing offers however, several of them have even worse overall terms than before. Keep in mind that lenders are not impartial and in the end are trying to make money.
- Money habits: Consolidation of debts cannot fix your money handling habits that resulted in the problem getting worse.
- Length of repayment: Sometimes you are almost done with the repayment of a loan. In such cases, it is a good idea to complete the repayment rather than opting for a longer length repayment.
- Affordable payments: In case you are not able to afford consolidated repayments you might rather wish to consider bankruptcy or debt settlement.
Debt consolidation is extremely useful in lifting the burden of monthly repayment from your shoulders. However, there are many other risks involved in it. It is not a decision you can take lightly. The biggest advantage of debt consolidation for several people is the smaller monthly repayments but takes sufficient time to ensure that it is worth the effort and is useful in your present circumstance. It is also significant that you are committing yourself to improve your financial habits and restore your credit. If you are looking to get help from professionals for improving your credit score in the Clearwater and Pinellas County, FL area, look no further than Super Credit Repair for expert and experienced help.
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