Too many Americans find themselves in the predicament of carrying over a balance of high-interest credit card debt each month, and it isn’t helping anybody’s credit score. The rising unemployment rates of the past several months have likely caused an increase in credit card debt globally. As a result, many households are now asking: How can I get out from under my credit card debt? Will debt consolidation hurt my credit? How does debt consolidation work?
To get out from under credit card debt, consumers are looking at various options, including credit counseling, debt consolidation, debt settlement, debt relief, and even applying for a personal loan or a balance transfer. Debt consolidation is an option open to many households for three reasons: It does not require excellent credit. It is not dependent on your income. And it shouldn’t result in the credit score damage that debt settlement and debt relief programs bring.
What Debt Consolidation Means
A debt consolidation program is where a financing company pays off a consumer’s credit card debt (typically multiple debts) so that the consumer can then pay off the debt in one simple consolidation loan. Instead of paying multiple high-interest rate credit card bills each month, you make one manageable monthly payment at a lower interest rate. In consolidating debt, convenience, stability, and lower interest rates tend to work in your favor.
When researching why debt consolidation is good, you’ll often hear terms like debt relief and debt settlement. Many ask: What’s the difference between debt consolidation and debt settlement?
When you go the debt consolidation route, your consolidation loan helps you repay all of your debts. You could almost think of debt consolidation as a sort of personal loan to pay off credit card debt. And paying off debt can help your credit history in the long run.
A debt settlement company, on the other hand, may result in significant damage to your credit score. Typically, in debt settlement, the company asks you to stop paying your credit card bills. Instead, you’ll send a monthly payment to the debt settlement company, and they'll hold it for you. After some time, that company approaches the frustrated credit card companies to negotiate a partial repayment (instead of paying your credit card debt in full). You can imagine what this does to your credit history.
Debt relief is a term often associated with filing Chapter 7 bankruptcy, a move that can harm your credit score, job opportunities, housing opportunities, auto financing chances, and auto insurance rates for the next ten years.
How Debt Consolidation Works
As we’ve mentioned, debt consolidation is when a finance company (such as ours) pays your high-interest credit card debts in full. You make one simple payment a month to that finance company until you become debt-free—assuming you have no other debts. Any federal student loan, home equity loan, secured loan, secured debt, unsecured debt, or mortgage debt will remain yours to handle separately.
Debt consolidation works because the culprit for most households is high-interest credit card debt. Once consumers get out from under their credit card debt, they can focus on rebuilding their financial picture—including their credit score, credit history, and sometimes even their relationship with money.
Will Debt Consolidation Hurt My Credit Score?
If you can continue to make your debt consolidation loan payments until you have paid off your consolidated loan, you will likely not hurt your credit score. It’s when you get involved with debt settlement companies and bankruptcy “debt relief” companies that you are more likely to run the risk of experiencing lingering damage to your credit history.
Will Debt Consolidation Affect My Mortgage?
If you plan to buy a home soon, pay off your debts as quickly as possible to give yourself the most favorable debt-to-income ratio before applying for a mortgage. If the easiest way for you to widen the gap between your credit card debt and your income is to use a consolidated loan service, devote your efforts to paying off the loan.
But if you already own a home and are concerned with the effects of a debt consolidation loan on your existing mortgage, you probably don't need to worry as long as you continue making your mortgage payments.
When is Debt Consolidation a Good Idea?
Debt consolidation is a good idea when you find yourself overwhelmed by the amount of credit card debt you’ve amassed—and not just the debt, but the high-interest rates that credit card companies typically charge. These interest rates are called APRs (short for Annual Percentage Rate) and can result in you paying hundreds (if not thousands) of dollars in interest over time.