How Debt Consolidation Affects Your Credit

No one wants to be living under a mound of debt, with the lingering thought of how to get out from under it nearly constant, making life stressful. If some type of emergency happens, you may not have the financial means to recover from it, and at minimum, it can make it difficult if not impossible to save, plan for retirement or ever achieve a sense of financial security.

According to Experian’s most recent annual study focused on debt and credit use in America, total credit card debt reached the highest point ever in 2017, surpassing $1 trillion, with the average credit card balance for Americans at $6,375, up about 3 percent from 2016. Of course, that means there are many people living in the U.S. today with a balance much higher than that – enough to feel like one is drowning in it, which is why so many consider obtaining a debt consolidation loan.

A debt consolidation loan is a loan that combines existing loans into one loan with a lower interest rate and a lower payment, helping to reduce the time it takes to make all those payments to creditors each month, aiming to reduce stress while streamlining the repayment process.

Debt Consolidation Comes with Pros and Cons

When done correctly, debt consolidation can be a good tool for getting out from heavy debt -depending on many different factors, such as the type of loan you’re planning to take, and your ability to change your spending habits. Taking on more new debt can end up making things worse if you take out a loan to pay off your debt, and then run it up again. Now you’ll have a consolidation loan to pay for and all those credit card payments. The key is to change your spending habits, being extra careful not to overspend and diligent about making payments on time.

While a debt consolidation loan can lower monthly payments and provide significant relief for those who are struggling with a large amount of debt, it’s important to be aware that taking out a consolidation loan often means paying more interest in the end. For example, if you use the equity in your home to obtain a loan, you’re going to pay significant closing costs and long loan terms, which could result in paying interest on debt for as long as 30 years.

What About Debt Settlement?

If you’re thinking about debt settlement, that can make your situation even worse, as creditors aren’t required to settle debt with consumers who legitimately owe them money, and not every company will work with a debt settlement company. Oftentimes, consumers start out making their settlement payments only to find they can’t afford to do so without giving up some of the necessities, such as food and heat. When that happens, all those payments are like throwing money out the window, as the consumer ends of filing bankruptcy anyway, something they were trying to avoid in the first place.

How Debt Consolidation Affects Credit Scores

A debt consolidation loan can help to raise credit scores, but it comes with a caveat. You’re going to have to pay your loan payments on time every month and keep your balances to less than 30% of the credit limit on each card that you have. The most difficult part is that you must change your spending habits and commit to not accumulating more debt.

Oftentimes, debt consolidation ends up hurting credit scores, as many people pay off those balances and then start charging again. Any increase in your score from reducing your balances will quickly decrease again. If you struggle to make your loan payments on time, it’s going to significantly lower your score – and, if you apply for loans or cards and are turned down, resulting in multiple credit inquiries, it can hurt your score too.

The Bottom Line

Everyone’s financial situation is different, in many cases bankruptcy is the better option over debt consolidation, which is why your best bet for making the right decision for your circumstances is to contact an attorney. If you’re in the Scranton–Wilkes-Barre–Hazleton, PA Metro area, you’ll find Wilkes-Barre law firms focused on helping consumers get out of debt, though attorneys specialized in aiding consumers in debt can be found throughout the nation.