What Debt Consolidation Is?
Debt consolidation usually come in two flavors: a consolidation loan and debt management company debt. Both solutions are still a consumer debt in a well-wrapped, and often lower monthly payment. However, deciding between the two can have an impact on your credit report and credit score --- both short and long term. So, before choosing a method of debt consolidation is best to know what you are getting.
Debt Consolidation Loan
Debt consolidation loans can be as a home equity loan (where you borrow against the equity in your home) or a debt consolidation loan personal secured and unsecured. Initially, lending this money will make your credit score a few points because it will increase its debt-to-earnings. However, as beginning balances to be transferred to the creditors on your debt consolidation loan, your credit score will improve. As you make payments on time for your consolidation loan debt from your credit score will not be adversely affected.
A couple of points to all this, however. Closing credit card accounts or personal loans after its placement under the umbrella of debt consolidation can have a negative impact on your credit score because creditors may appear as if you do not know how to manage your money properly.
Another factor that may be detrimental to request additional credit shortly after obtaining a debt consolidation loan. It can be seen as something negative, if a consumer is applying for credit more than once every six months.
Debt Consolidation Company
Debt consolidation companies do not lend money. Its function is to negotiate with creditors on your behalf to reduce or freeze interest rates, then to create a single, affordable payment. In this scenario, pay the debt consolidation company each month, and disbursement of payments under each of your creditors.
What does this do to your credit score? Not good. Because these debt consolidation experts are establishing their credit card companies to pay less than you owe, this does not seem favorable to the banks or lenders and lower your score. The company's debt management has also placed a flag on your credit report, alerting potential lenders that have consolidated their debts, reducing your chances of getting a loan approval.
In many cases, the creditor will close your account after the reward, further damaging your credit rating. While the convenience of a debt consolidation company may seem attractive, it is important to note that unless you are behind on payments the company may not offer the best chance of keeping your credit in the black.
