The economy is not working in favor of most of us. More and more households are digging themselves deeper into debt by taking out more loans and accruing a steep balance on their credit card. Finding ways to pay off that loan by causing the least amount of damage to your credit rating can be a daunting task.
Many debtors opt for a method known as a debt consolidation loan. It allows you to manage your accounts efficiently, in an organized manner and offers financial benefits to you or your business. With that said, there are a few downsides to the remedy.
There are ways of knowing how to eliminate debt without hurting your credit.
How Can A Debt Consolidation Loan Can Hurt Your Credit Score?
A debt consolidation loan can have a simultaneous positive and negative effect on your credit rating. This will depend on a few circumstances. Here’s what you can look out for:
Lenders usually do a credit check on whoever applies for a debt consolidation loan. This process is known as a hard inquiry. Performing such a process can reduce your credit score by as much as 10 points, however, your score will only have to endure the damage for about a year at most.
Credit Utilization Might Be Reduced
If the debt on your credit card is fairly high, then you probably also have a higher credit utilization ratio. You can calculate this by dividing the balance on your credit card by the total credit limit on your card. A credit utilization ratio of above 30 percent is regarded as a negative aspect on your score.
If you make payments on that debt by taking out a personal loan, then the percentage of your credit utilization ratio will decrease and thus improve your credit score. In this case a debt consolidation loan can actually improve your credit score. This aspect is counted as 30 percent of your credit score so it is definitely worth paying attention to.
Closing Credit Accounts Affects Your Score
The age on your credit accounts makes a big difference to your credit rating. It makes up 15 percent of your overall score. The older your credit accounts are, the more it benefits your score. Opening up a new credit account will result in a reduction of the average age on your credit score. If your further close your accounts after debt consolidation, it can also reduce the age of your accounts as a whole.
Fortunately, you can find ways to resolve a problem like this. Sometimes you may own credit cards that have a steeper interest rate than cards offered more recently. You can do debt consolidation by getting the new card with a lower interest rate. This can cause a temporary injury on your credit account but it will all be worth it in the long run.
When Is The Right Time To Consolidate Your Debt
Debt consolidation loans are widely popular due to the fact that it helps them to save money on the interest that they will have to pay. Debt consolidating can save people wads of cash on interest if it’s done in the right way.
People also opt for debt consolidation loans because it makes it easier to manage debt and make the relevant payments. Many people struggle to keep track of their bills and monthly instalments on different debts, therefore it is much easier to get a debt consolidation loan.
The Best Methods To Use To Consolidate Your Debt
The most effective plan to consolidate your debt begins by creating a list of all of your existing loans and credit cards. You should put together the full amount balance, interest rate, minimal monthly installment and overall continuous payments.
Later, determine what kind of debt consolidation approach you would want to use. Research the different options so that you are fully satisfied with your choice. You need to get quotations from various lenders and then compare APRs, conditions and overall interest paid. Done carefully, debt consolidation can ultimately help your credit, rather than hurt it.