When it comes to debt consolidation, there are a few different methods. The method that you use and your diligence to follow the repayment plan determine whether it will help or hurt your credit score. Debt consolidation is used when people want to streamline several high-interest debts to lower their debt burden and save money.
While lowering your debt over time can help your credit score, debt consolidation is often used to reduce/eliminate debt, not necessarily to increase your credit score. In this blog, we’ll take a closer look at how debt consolidation can hurt your credit score and how it can help. Hopefully, this will help you decide if you want to use debt consolidation to find another avenue.
How Can Debt Consolidation Hurt my Credit Score?
Debt consolidation can potentially hurt your credit score in a few ways, depending on the method you use. If you are using a debt management plan, it’s important to understand the agreement you make with the credit counselor. In addition, it is important to know whether you are working with a non-profit organization or a for-profit settlement/consolidation firm.
Credit Counselor/Debt Management Plans
Typically, a credit counseling organization is a non-profit that exists to advise people on managing their money and establishing budgets. In some cases, a credit counselor will work with you to establish a debt management plan and help you with making your payments.
While a debt management plan doesn’t show up on your credit report, your credit counselor may ask that you close your other credit accounts to make sure that you’re not spending money outside of your repayment plan. Keep in mind that closing your revolving credit accounts increases your credit utilization. Which will have an impact on your credit score.
It’s critical to ensure that the credit counseling organization is making the payments on time. After all, payment history is an important part of your credit score. So you don’t want any late payments being recorded.
Debt Consolidation/Debt Settlement Companies
Before you try to get a debt consolidation loan, it’s important to know what range your credit score falls into. Those who have a poor credit score may find it hard to get approval on a debt consolidation loan. However, those with “fair” to “exceptional” credit will have an easier time getting approved and will be likely to be given a favorable interest rate.
How Can Debt Consolidation Help my Credit Score?
Debt consolidation is primarily a way to lower/eliminate debt- but it can affect your credit score. In addition to helping you reduce the number of payments you are making each month, you are saving on interest. Therefore, you can drastically reduce or eliminate total debt over time.
By consolidating your revolving debt, you are working towards reducing your credit utilization. This is calculated by comparing your total credit with how much you have used of that. This is 30% of your credit score.
If you feel like you’re struggling under the weight of mounting debt, contact BT84 Commercial Capital & Business Solutions. We will be more than happy to help you determine what your best options are.