Will Debt Consolidation Impact My Credit Score?
Feeling a little overwhelmed by debt? For individuals who owe money to a variety of different places, debt consolidation may be the best way to overcome those financial woes and improve credit. There are three primary methods of debt consolidation to consider: credit card transfers, home equity loans, and consolidation loans. Typically, it’s best to avoid the first of these methods because it can actually hurt your credit score. Credit reports account for how much of a person’s credit is in use (see Four Actions that Can Lower Your Credit Score), so passing the balance from one to another is counterproductive. By eliminating option one, we’re left with home equity and debt consolidation loans.
Both of these methods involve paying off outstanding accounts with a single installment loan, allowing you to make regular payments to only one predicable account. Although new debt is created, the process is simplified: you can expect the same month-to-month financial statements, making it easier to establish a payment routine. Especially with a home equity loan, this primary account may also incur less fees than the five half-maxed credit cards sitting in your wallet.
Debt consolidation, if done correctly, may benefit your credit score. With this said, your points may dip at first, though after a few months of timely payments, your score will rise above what it had been. If, however, you miss your payments, your score will suffer greatly. But the greatest challenge is often not managing the consolidation loan, rather finding one. Depending on your financial situation, major institutions may not even offer you home equity options.
If your score prevents you from obtaining a loan, a debt management plan (DMP) may be the best alternative. In this scenario, a debt counselling agency accepts a single monthly payment and pays all of your existing accounts with that money on your behalf. Technically speaking, this is not consolidation, but it is close enough for most people. Before taking this path, double check with your bank that no exceptions can be made. As well, shop around for the best deals and rates before settling. The last thing you want to do is take on more monthly fees — debt consolidation is all about easy debt management.
Trillium is associated with a debt management company that we work with to help structure these types of arrangements, call us we can help!