When you are deep in debt or have so many accounts that you lose track of them, you may consider doing a debt consolidation. A consolidation moves all of your bills into one account, with one monthly payment. There are many ways to accomplish this, and each will affect your credit in different ways, ranging from possibly improving your credit to totally devastating it.
Home Equity Loan
You can use a home equity loan or line of credit to consolidate your debt. If you have an open line of credit, you would probably write checks on that account to pay off each of your creditors. Then, you would make one payment on your home equity loan. This approach could affect your credit in various ways. If you leave all of your credit accounts open with zero balances, your score would probably increase due to a favorable change in account utilization. If you close all of your revolving accounts, it could have a negative effect for the opposite reason.
Zero Percent Credit Card
When you receive an offer for a zero percent or low interest credit card, you might have the option to transfer balances from other accounts. Most of these introductory interest rates last only a few months. Avoid cards that reset to high rates when the introductory period ends. You can roll the balances onto a new low-rate card when the introductory period stops, provided you qualify. This type of debt consolidation in the short term has a minor impact on your credit that can be positive or negative. Over the course of a few years, it could reduce the average length of time your credit accounts have been open, and cause more inquiries. Both of these things can reduce your credit score.
Debt Managing
Debt managing or credit counseling is an approach to debt consolidation that does not involve borrowing money to move around your debts. You sign up with a credit counseling organization to figure out a payment arrangement that works with your budget. The agency negotiates with all of your creditors to get them to reduce their payment amounts and their interest rates. In some cases, they will even reduce the amounts owed. You then make one payment to the agency, which sends the payments to each of your creditors according to the plan. Your credit will probably take a hit with this type of arrangement. Many lenders look at credit counseling the same way that they look at a Chapter 13 bankruptcy.
Debt Settlement
Debt Settlement is not a form of consolidation in the truest sense, but people looking into debt consolidation often consider it. With debt settlement, you stop paying all of your unsecured creditors, and put the money in a savings account. Your credit cards become past due, and eventually go to collections. When you have enough money in your savings account, you contact a creditor and offer them a settlement for pennies on the dollar. Some firms offer to do this for you for a fee, which can be quite large. Your credit score will take a severe hit with this type of plan, as you will have multiple serious delinquencies.
Considerations and Cautions
If you consolidate credit card debt onto a home equity line or a credit card with a lower interest rate, you must not charge anything more on your original credit cards. Doing so would leave you deeper in debt than you were before. If you use a credit-counseling agency, verify that it is reputable, and monitor to assure the agency makes all the payments on your loans. Debt settlement agencies are notorious for fraud. Be extremely careful if you choose to go with one of these. If you must damage your credit to consolidate and get out of debt, you can rebuild it sensibly after you pay off everything.
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