Debt consolidation is reorganizing debts so that, in theory, they become more manageable. This is a common practice for debtors who can't manage their debts with their current incomes.They often have different types of debt, especially credit card debt, with varying interest rates and due dates. Debtors who choose debt consolidation work with businesses that charge fees for debt organization to create new plans with manageable monthly payments that go to paying off all their unforgiven debts.
Credit Scores
Credit scores reflect a person's record of paying his debts as agreed, which means in full and on time. The more a person pays late or not at all, the lower his credit score will be.
Benefits
Consolidating debt typically benefits the borrower's credit score in one significant way: It keeps many loans from being defaulted on completely, salvaging them so that they can ultimately be paid. In general, a defaulted loan is the worst thing for a credit score and should be avoided at all costs. Debt consolidation is one of the primary methods to mitigate the bad credit scores that come with defaults.
Considerations
While consolidating debts is a good method to avoid some of the worse effects of not paying loans as agreed, it doesn't prevent negative effects entirely. Credit scores will still register a delinquent account. Debt consolidation also requires getting a new loan to replace the old ones, which can lower the score as well.
Rating Negotiation
Rating negotiation is an important part of the debt consolidation process. When the debt is consolidated, borrowers must contact their creditors (or collection agencies) and make sure that all accounts are closed and settled, especially accounts with collection agencies. This will help improve scores in the short term.
Long-Term Scores
In the long term, the credit score depends largely on how the borrower performs with the consolidation loan. If the borrower makes regular, timely payments on this new loan, his credit score will rise.
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