Debt consolidation is just one of many potential solutions for your credit card debt. However, as with all other options, it's important to understand the impact that debt consolidation can have on your credit score. Depending on your level of discipline, debt consolidation can either help improve your score, or it can help to destroy your score.
Debt Consolidation
Debt consolidation is a way to get all of your different credit card bills combined into one monthly payment. In debt consolidation, you take out a loan -- usually a home equity loan or a personal loan -- and use the funds from the loan to pay off your credit cards. Your credit accounts remain open and are fully paid off, and you are only responsible for paying off the loan.
Advantages
If you have a lot of different credit cards with balances, debt consolidation may be an appealing option for you. Going this route can save you the headache of remembering which bills are due on which dates, then having to make those payments on time. In addition, a debt consolidation may result in a lower interest rate than you're currently paying for your credit cards, which can help your credit score because you can use your extra cash, not your credit cards, to pay your bills.
Disadvantages
The biggest problem with a debt consolidation is that it doesn't do anything to help you get out of debt. Instead, it just replaces one type of debt with another. Worse yet, it leaves you with the opportunity to rack up your credit cards once they're paid off, which happens to many people who go through the debt consolidation process. Should you end up in this situation, you'll not only be in the same hole you were once in, but it'll be worse because you'll have to worry about paying the consolidation loan as well. This can tarnish your credit score because you'll have too much debt outstanding and too many creditors to pay. Unless you can stick to a budget that minimizes the use of credit cards, consolidation might be a dangerous trap.
Alternatives
If you're wary of doing a debt consolidation, but still want to pay down your credit card debts, you can choose an alternative means of managing your debt. If preserving your credit score is a priority, a debt management program is your best option. In this type of arrangement, you make your payments to a company that pays the credit card companies on your behalf. Though you'll likely have to close out your credit accounts, which does hurt your score, you'll receive better interest rates in the process, and the string of on-time payments you'll build will improve your score over time.
If your credit score is not a priority, options like bankruptcy and debt settlement can help you to get out of debt. However, these methods will leave your credit in ruins for years to come and should be avoided unless there is no other alternative.
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