Pros & Cons of Concentrated Debt

Concentrated debt might help you climb out of debt, but it can also hurt your credit score in the process. How much benefit you receive from concentrating debt depends on the specific method of debt consolidation you choose. A debt consolidation loan or debt management plan are the most popular forms of debt concentration available.

One Monthly Payment

Concentrating your debt in once place through a consolidation loan or debt management plan allows you to make payments on all your debts by making one monthly payment. This can make your debts much easier to manage, especially if you have debts with due dates strung out across the month. You can also avoid the chance of missing payments on your accounts when you concentrate your debt. Missed payments for credit accounts, including credit cards, often incur late payment fees of as much as $40.

Fixed Repayment Term

A consolidation loan or debt management plan creates a structured repayment calendar which pays your debts off over a finite period of time. You are no longer shackled under the open-ended repayment terms of your credit card companies and credit line holders. This can provide you with a sense of relief that you can become debt-free and also creates a goal for you to work toward in becoming debt-free.

Loss of Available Credit

The problem with a concentrating your debt is the loss of your available credit. A consolidation loan typically requires you to close your credit card accounts and lines of credits. A debt management plan allows you to keep your credit accounts open but your creditors will typically bar you from using your cards until you have successfully completed the repayment period. The lack of a credit card can hurt you if you travel frequently for business because most hotels and rental car companies require credit cards to a debit transaction.

Damage to Your Credit Score

A debt consolidation loan can hurt your credit score because your credit accounts are closed as a result of the debt concentration. This can make securing new lines of credit more difficult if your credit score is already damaged due to defaults or late payments. Negative notations on your credit report can remain for up to seven years even if you resolve the delinquency quickly. A debt management plan should not have a direct effect on your credit score though your score could suffer because you are not using any credit available to you because your accounts are locked.