People who use debt consolidation programs need to be aware of the potential impact such methods have on your credit report and credit score. Like any other loan you take out, a debt consolidation loan or service can have different impacts on your credit rating depending on the nature of the loan and how you behave as a credit consumer.
Debt Consolidation
In its simplest form, debt consolidation is a new loan you use to pay off two or more other loans. If you use a debt consolidation service or program, you obtain money from a new lender to pay off your other creditors. By using the new loan in this way, you consolidate your previous loans into one loan, allowing you to make a single payment each month, sometimes at an interest rate that is lower than that of the consolidated loans.
Credit Score
Any time you obtain a new loan, apply for a loan or make payments on your loans, your behavior as a credit user impacts your credit report and credit scores. Positive behavior, such as paying your bills on time and not using all the credit available on your credit cards, generally increases your credit rating, while negative behavior, such as defaulting on your loans or using a high percentage of your available credit, generally lowers your credit rating.
Positive Impact
If you use a debt consolidation program or service to effectively address your debt problems, this generally has a positive impact on your credit score. For example, if you previously had three loans you had trouble paying on time, you're late payments hurt your credit score. If you use your debt consolidation loan to enable you to make monthly payments on time each month, your score will usually improve, because timely payments are a key factor in your credit score.
Negative Impact
A debt consolidation program does not do anything to decrease the amount of money you owe your creditors. Often, these programs extend the terms of the loan and end up costing you more money in the long run while charging you less per month. Like other loans, if you fall behind on your payments or default on the consolidation loan, this will seriously harm your credit score regardless of how poorly or responsibly you use your other lines of credit.
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