Debt consolidation by combining several balances of debt into a new loan is likely to increase your long-term credit scores if you use it to pay off debts. However, you may see a decline in your credit ratings at first. That can be OK, as long as you make your payments on time and don't accumulate more debt. Consolidating your debt can affect your credit rating, but as long as you manage your debt responsibly, any negative effects will be temporary.
Understanding your options and how they affect your credit rating can help you determine the right steps. Any request for credit usually results in a thorough inquiry about your credit, which may lower your credit rating by a few points for a few months. However, the overall credit effect of debt consolidation should be positive if you ensure that you pay on time and change the habits that caused the debt to accumulate. Homeowners can use the home's equity to obtain a one-time lump sum loan or line of credit (HELOC) to consolidate the debt.
It has the same impact on your credit rating as any other loan, meaning that your score will improve if you make payments on time and will be affected if you don't pay. Since you're using your home as collateral, the worst-case scenario is that you'll lose it if you don't make payments on time. A home equity loan is similar, but it's a lump sum rather than a revolving line of credit. The best way to consolidate your debt without damaging your credit is to create a plan and stick to it.
Fortunately, there are ways to minimize the negative impact that debt consolidation can have on your credit. Don't think that paying your credit card bills with a consolidation loan means that you can use the cards recklessly again. If you already have a strong history of timely payments, debt consolidation may not affect this aspect of your credit rating. Be sure to apply for these loans and credit cards within two weeks to avoid multiple difficult queries on your credit report.
If you have good credit, you may want to consider more than one approach to consolidating your debt, including credit cards with balance transfers, personal loans, and home equity products. Consolidating your debt can also help you improve your overall financial situation, which can make it easier to control other payments on your debt. The most common are debt management plans, personal loans and credit card balance transfers, but you can also consider a home equity loan or line of credit (HELOC) or apply for a 401 (k) loan. The best way to increase and maintain a good credit score after debt consolidation is to make all your payments on time and keep your debt balances under control.
However, if the debt consolidation methods listed above aren't attractive or unattainable, there are alternatives you can explore. Once you receive your loan funds, you'll pay off your debt and start making payments on your new loan. You'll start by comparing the interest rates of some lenders to see which one offers you the best deal and you'll request enough money to cover your current debts. Two common methods of debt consolidation are obtaining a debt consolidation loan or a balance transfer card.
It reduces your debt and establishes a basis for consistent timely payments, which can cause your credit rating to skyrocket.