How to consolidate debt without hurting your credit
It is crucial to find creative ways of paying off debt, as American households are increasingly racking up large balances on their credit cards and loans. Debt consolidation is an option if you owe money to multiple creditors. Consolidating your debt will allow you to organize your accounts and have a lower interest window for paying your balances.
But debt consolidation has its downsides. While debt consolidation may temporarily affect your credit score, there are ways to minimize its effects.
How does debt consolidation work?
Consolidating debt involves consolidating multiple loans into one loan and refinancing them with a different lender. Consolidating your loans can be done in many ways. You can reduce your loans by taking out a personal loan. However, some people prefer to use HELOCs or home equity loans.
The process of getting a loan is the same regardless of the type. Start by comparing interest rates from different lenders to find the best deal. Next, ask for sufficient money to pay off your existing debts. After receiving your loan funds, you can pay off your existing debts and begin paying off your new loan.
How debt consolidation can affect your credit
A debt consolidation loan can have a positive impact on your credit score depending on several factors. Here are the facts.
It is time to do a thorough investigation.
The lender will conduct a credit check when you apply for a consolidation loan. This will result in a thorough investigation that could lead to a 10 point drop in your credit score. Your credit score will not be affected by serious inquiries for more than one year.
Credit usage may decline.
A high credit utilization rate can also be a result of a large credit card balance. This is calculated by taking your total credit limit and your current card balance. A credit score ding may occur if your credit utilization rate is higher than 10%
If you repay this balance with a personal loan, your usage percentage will drop, and your credit score will increase. Credit utilization is 30% of your credit score. It’s, therefore, an important aspect of your credit.
Closed accounts can affect your score.
Your credit score is 15%, of your average credit age is 15. The average age of credit history will decrease when you open a new one. Consolidating old accounts will reduce your middle age.
There are solutions to this problem. You can consolidate debt from old credit cards with high-interest rates by getting a new card with lower interest rates. While the new card might temporarily affect your credit score, you can offset these effects by keeping all your existing cards open, even if they are never used.
Consolidating your debt is a smart move.
Consolidating your debt to reduce interest is the most common reason. You could save thousands or hundreds of dollars if you consolidate your debt at a lower rate.
Consolidating debt can also be used to simplify your monthly payment. Consolidation might be a good option if you have trouble paying your bills on time because of different due dates.
Consolidating your debt is the most innovative option
A list of all current loans and credit cards is the best way to consolidate your debt. Input the total balance, interest rate, and minimum monthly payments.
Next, decide which type of debt consolidation option is best for you, such as a personal or home equity loan. Compare the terms and APRs of multiple lenders to get estimates.
To avoid multiple inquiries on credit reports, make sure you apply for these credit cards and loans within the next two weeks. You can then compare all your offers with this debt consolidation calculator and decide which lender to choose.
Three alternatives to debt consolidation loans
If you want to eliminate debt, there are several options, but you don’t want to take out a consolidation loan.
1. Debt management plan
You can sign up for debt management through a non-profit credit counseling agency if you feel overwhelmed by debt. Instead of paying your lenders directly, you will make a monthly payment through the agency. This then pays your suppliers.
2. Transfer balances by credit card
You can save more money by transferring your credit card balance to a card with 0% APR than getting a consolidation loan. If you receive a 0% APR deal for 18 months, and you can repay the balance in that time frame, you won’t owe interest.
Although you may be required to pay a 2-5% balance transfer fee, it is likely lower than if the loan was personal.
3. Budget overhaul
You can pay off your debts on your own if you don’t wish to apply for a consolidation loan. Set a realistic budget, and then focus on the debt. Look at where you can reduce your spending and put that money towards your debt. You can add any raises or windfalls to your loans.