One of the most important things any adult can do for their persona life is get their financial life in order. Creating a good budget, sticking to it, and getting rid of debt is the best start. Financial freedom is priceless, and it’s not something many people understand. It doesn’t happen to those who aren’t focused on their finances, and that’s why it’s imperative consumers learn how to manage their debt. You know you must pay it off, but how do you do it in an affordable manner? Many consumers turn to debt consolidation for the answers, but it’s not always found in that situation. Here’s some information regarding how debt consolidation changes your financial future by affecting your credit. Learn what it means for you before you consider it as an option.
Know the Differences
Not all debt consolidation is created equal. There are several forms of consolidation, and many of them have very little effect on your credit score. You can apply for a loan to consolidate your debts. Some consumers choose to apply for a new credit card with a long introductory period with no interest on balance transfers to give them the boost they need. Others take out a home equity line of credit. Some people even choose to consolidate their debt into another loan.
Each of these methods affects your credit, but not typically by much. There’s the hard credit check inquiry that might drop your score a few points. There’s added credit to your profile, which might drop your points. There is a higher credit limit available to you with this option, which could improve your score by dropping your credit utilization percentage a bit. These are methods that typically have little to no negative effect on your credit score. It’s why so many consumers choose these to consolidate their debt and live their lives.
The other type of debt consolidation is through a debt consolidation company. This is typically a last resort. These companies only work with clients who have missed payments, severely delinquent accounts, and other issues. If you’re already in trouble with your debt, your credit score has already taken a major hit, which isn’t good.
Debt Consolidation and Your Credit Score
Consumers who work with a debt consolidation company to settle their debts are going to see their credit score drop significantly. This often requires making no more payments to creditors while companies negotiate settlements. These settlements are for less than the amount you owe. You’ll make one lump sum payment to the credit consolidation company each month, and your cards are paid off in as your account allows. This takes approximately 5 years, and it can have a very negative effect on your credit.
One reason is your creditors are not obligated to work with the company, which means you are still paying some cards without the help of this company. Late and missed payments, and accounts you simply stop paying do remain on your credit report for 7 years. You’ll suffer with a less than perfect credit score at least this long before negative items are pulled and your score rises significantly. If you’re willing to wait this long or you haven’t a choice, it’s an option that could work in your financial favor.
Making the effort to find best debt consolidation company you can will greatly help your credit score. If you have good enough credit to apply for a new loan or credit card, do that first. Turning to professional companies should be a last resort for anyone looking to pay off debt. The cost is high, and the effect on your credit can stop you from securing a loan to buy a home or even a new car. It could cause your score to drop enough you no longer seem like a good hire to new companies when you seek a new job, and there are always those who end up regretting using companies like this. Of course, the decision is yours alone and knowing what you might see in terms of your credit score helps you make the most educated decision.