In some circumstances, debt consolidation loans can be a good way to patch up your damaged credit. However, turning to a credit consolidation company in desperation probably won't yield the most ideal circumstances. If you're behind in your payments or at the limit of your credit, you may not receive the best offer from any lender. Before you enter into a debt consolidation loan, know and understand the terms of your agreement.
Paying Off Debts
In some circumstances, a debt consolidation loan may help improve your credit score. By transferring balances from credit card companies to a single consolidation firm, it appears as if you paid off old debts, a maneuver that may raise your credit score. At the end of a balance-transfer loan, you still carry the same amount of debt, but it appears different on paper.
Keep Old Accounts Open
When your credit consolidation company assumes the debt from your credit cards, do not close those accounts if you want to improve your credit score. By keeping these cards open, you will continue to maintain your oldest credit lines, a move that helps boost a credit score. You will also have a larger amount of untapped credit in your credit history instead of a single loan, which can make it appear that you reached the limit of your credit.
Building Positive Credit
If everything goes correctly, your debt consolidation loan will help you build additional positive credit. If you continue to make payments on time, rather than missing payments on credit card bills you couldn't afford, you will build a positive credit history that will slowly improve your credit score.
Potential Late Fees
Some credit consolidation loan companies operate more like a debt-collection agency, and slowly repay your debt to your creditors month by month, receiving a rebate on the balance for the hassle of rounding up your payments for them. Rarely, these companies make your payments behind schedule or fail to make them in your name, according to MSN Money. When this happens, it's as if you failed to pay, and the card company will report you as missing a payment or paying late, either of which will negatively affect your credit score.
Negotiate Your Own Deal
In some cases, debt consolidation companies may essentially renegotiate your debt, lowering interest rates and shuffling payment schedules with your creditors. Often, this is a tactic you can negotiate on your own, and improve your credit score without incurring the additional fees that come with credit consolidation loans.
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