Staring at a pile of credit card statements is not exactly enjoyable. The statements reveal several high balances. On the statements is a notation regarding minimum payments. The notation reveals how much interest will be paid along with how much time is necessary to get the balance down to zero. Learning minimum payments come out to an extra $17,000 in interest over the course of 30 years on three cards is definitely depressing. Mercifully, a potential solution does exist. Debt consolidation offers do promise a means in which all that unsecured debt can become vanquished to history.
Not everyone wants to jump into debt consolidation plans. A serious concern exists among many debtors. The wonder if debt consolidation will actually harm their credit further.
The Value of Debt Consolidation
People explore debt consolidation loans for the express purpose of paying off their outstanding balances. Overall, a debt consolidation loan is a good move because the new borrowing furthers the goal of becoming debt free.
Debt Consolidation Loans vs. Debt Consolidation Services
Debt consolidation loans are new loans taken out — at a lower interest rate — to pay off unsecured debt. Debt consolidation services are something a bit different. These services negotiate debt settlements and then pay off the debt. Now, the borrower is obligated to monthly payments to the consolidation service. This process definitely harms a credit score. The debt settlement arrangement is very negatively reflected on a credit score. Only those in a horribly dire situation should research debt consolidation service plans.
A debt consolidation loan, however, reflects a benign way to pay down debt. Applying for the new loan will have a slight effect on a credit score.
Impacting a Credit Score
When applying for a new credit card or a personal loan with the intention of consolidating debt, an inquiry is made into the applicant’s credit history. This inquiry is reported to the credit agencies. The effect here is a minor one. It encompasses a small percentage of the overall distribution of factors that craft a credit score. Better still, the impact only remains on a credit score for about one year. After that, the inquiry drops off and takes along its impact.
Credit utilization factors into credit score tabulations to a far greater degree. Credit utilization refers to how much available debt is being used. Someone who has already borrowed 90% of his/her limit does not exactly look like a person who is in control of day-to-day finances. He/she becomes a borrowing risk with such significant debt. Credit scores for such borrowers end up being lowered as a result.
Debt consolidation opens a pathway to addressing the damaging impact of excessive credit utilization. Consolidating debt onto one new account allows for paying down the balance in an easier manner. The lower interest rate makes this possible. As the balance goes down, the negative impact of credit utilization drops as well. Over time, a credit score starts to improve. Of course, this assumes no new debt is being charged on the now zero-balance credit cards. Running up debts on these card combined with maintaining a balance on the debt consolidation loan would prove disastrous.
Don’t close out those credit cards though. Closing out the cards does make it impossible to use them. The trouble is the debt-to-credit ratio on a credit scores gets negatively altered. Owing $8,000 and having $16,000 in remaining credit available means the debt-to-credit ratio is 33% to 66%. Closing out credit cards and having only $2,000 in remaining credit with $8,000 outstanding debt would not be a good thing on paper. Debt-to-credit ends up being tabulated at 80% to 20%. Maybe it would be best to keep the credit card accounts open and just employ the discipline not to use them.
Restoring Good Credit and Financial Freedom
At some point, debt and bad credit reach an apex. A life is upended, limited, and, possibly, ruined by the inability to control indebtedness. A debt consolidation loan offers a multi-year plan for putting financial problems to rest. As long as the terms are reasonable, the interest rates low, and, most importantly, the borrower is responsible, a debt consolidation loan should lead to a positive conclusion.