Credit Consolidation Information

Commercials and advertisements make credit consolidation sound attractive; however, you must beware of how you play the game of credit or else your score may take a severe hit. Balance transfers, consolidation loans and debt management plans are all ways of getting your debt in one place and paying it down with a single payment each month, and each comes with its own set of risks. Before committing to a consolidation option, it's vital that you understand how to use each one to avoid credit pitfalls.

Balance Transfers

If you qualify for new credit, balance transfers are the easiest way to consolidate your credit; however, balance transfers are tricky and should be used with caution to avoid damage to your credit score. Although a card with lower interest may allow you to pay off your debt for less money, just opening a new card dings your credit score by five points. Also, if you transfer your balances to a card with a lower limit, this severely impacts your debt-to-credit ratio, or the amount of debt you have in relationship to the amount of credit you have available, which is one of the biggest factors in calculating your credit score.

Consolidation Loans

When a bank or lending institution gives you a loan using collateral, such as your house, to pay off your debt, it's called a consolidation loan. One of the benefits to a consolidation loan is that you make one monthly payment to the loan rather than multiple payments to your accounts. Consolidation loans are often advertised as having very low interest rates; however, you must have extremely good credit to qualify for those rates, so it's important to compare your current rates closely before applying. Having a consolidation loan on your record may make it difficult to obtain new credit down the road.

Debt Management Plan

You will only qualify for a debt management plan if you are already delinquent on your accounts and having trouble making payments. A credit counselor must recommend a DMP. On these plans, the counselor negotiates your interest rates and attempts to reduce your overall balances, then creates a time line over which you will pay off your debt. You make one payment to the credit counseling service, which in turn pays your creditors. A DMP is also seen as a dark mark on your credit record, and you will likely be unable to obtain new credit while on the plan.

Warnings

Opening new credit cards over and over to take advantage of lower interest rates seriously damages your credit scores and looks flaky to lenders. The age of your accounts is a factor in determining your credit score; the older your credit, the better it reflects on your score. You must be fully committed to a consolidation loan before taking one on. People oftentimes fall further into debt by using the newly freed credit once the loan pays off former balances. Finally, you must make sure you're working with a reputable credit counseling program if you take on a DMP. If the company fails to make payments to your creditors on time, your credit score will be severely harmed. Check with the Association of Independent Consumer Credit Counseling Agencies or the National Foundation of Credit Counseling before agreeing to a DMP to see if your counseling institution is trustworthy.