Is Debt Consolidation Bad for Credit?

By Joyce Starr

  • Overview

    Many people worry every month how they are going to pay off their skyrocketing debt. In fact, worrying over debt is one of the leading causes of stress in the nation today. For many, debt consolidation may be the only way out of this stressful situation. In the long run, consolidating your debt will eventually lead to a higher credit score and a more relaxed life.
  • Who Needs Debt Consolidation?

    If you find yourself struggling to make ends meet every month, debt consolidation may be the answer for you. It is an answer to not having to file bankruptcy for many. Sometimes life throws us a curve ball through an unplanned emergency, such as illness or injury, and debts mount up. If you find yourself in this situation, it is best to look at your debt consolidation options before you let things get totally out of hand. There are agencies out there that specialize in this type of situation that can help you decide which option is best for you and save your credit at the same time.
  • What Is Debt Consolidation?

    Debt consolidation basically takes all your loans and forms them together into one. Instead of facing a multitude of payments every month, all of these debts are consolidated into one loan, meaning one payment. The advantage besides having only one payment to make, you'll have a longer period of time in which to pay it. Your credit score will raise because these past debts will no longer exist. As long as you remain current on the debt consolidation loan, your credit will not be affected adversely. The main goal in debt consolidation is to try and lower your monthly debt by at least 50 percent.

  • Where to Start?

    Feeling overwhelmed in debt can cause depression, a feeling of helplessness, as well as affect your family and everyday life. The main purpose of debt consolidation is to help you regain control over your life, finances and avoid having to file bankruptcy. When considering debt consolidation, you need to educate yourself in order to avoid the vast amount of scammers who are out there trying to take your money. Getting a copy of your credit report is mandatory. You need to know exactly where you stand credit wise. Your credit report will give you an insight on what you need to consolidate, your credit standing and if your should consider filing for bankruptcy. You can get a free credit report from the credit reporting agencies, once a year. Credit counseling is another option that many people find useful. It is best to check with the Better Business Bureau before deciding on going with any company. Beware of companies charging high fees to help you, since this will only make your monetary burden much higher. Legitimate companies will work with you and your creditors to try and lower your monthly payments or interest rates. Sometimes these agencies can get your debt combined into one monthly payment. These type of deals can affect your credit rating, but after you have made current payments for a length of time, your rating should begin to rise.
  • Home Equity Loans and Lines of Credit

    These type of loans are generally known as second mortgages. You tap into the equity that you have accrued in your home to get the monies you'll need. With an equity loan you will receive all the monies in one lump sum. Usually the bank will pay off your outstanding debts from the monies that are borrowed. With a line of credit, you can draw from a certain amount of money as you require it. Most of these type of loans offer much lower interest rates than what you are paying on your current debts, such as credit cards. They are often tax deductible. These type of loans will help your credit rating because now you will have only one debt, instead of several.
  • Refinancing Your Mortgage

    Another option is to refinance your mortgage. These type of loans have either a fixed or adjustable interest rate that you pay back to a financial institution every month. You are able to get the cash you need by refinancing to a lower interest rate and possibly lowering your monthly payments. As long as you can make the monthly payments, your credit score will not be affected adversely.

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