Consolidating debt brings a lot of positive effects. One of the aspects in your financial life that it can affect is your credit score. When done correctly, debt consolidation will not just help you get out of debt. It can also help you fix your finances and improve your ability to receive financial opportunities. Apart from low-interest rates on loan applications, you might even be eligible for pre-approval on your applications.
Of course, the key word here is that it should be done correctly. We all know that your financial habits can affect your debt relief efforts. If you make a mistake in consolidating debt, it might not end well for you. There is a high possibility that you will come out with a worse debt situation. This is why you need to make sure that you perfectly understand how to implement this debt solution so it will only bring you positive effects.
How consolidating debt can positively affect your credit score
To motivate you to do good, here are the positive effects that consolidating debt can bring to your credit score.
Consolidating your debts can help you manage your payments better
One of the biggest benefits of consolidating your debts is that you get to focus on just one account. As you combine your obligations under one payment, you also only have to worry about one due date. Even the interest rate will be easier to remember when you consolidate making it a lot simpler to understand your payments. This makes it easier to keep up with your monthly dues. There is a lower chance that you will miss out on payments because you forgot to prepare the funds for it.
According to reports, 1 out of 4 adults is not paying their dues on time. Do not be a part of this statistic. Make sure you can pay your dues in time. Simplify your credit situation by consolidating your multiple debts.
Lower monthly payments can free up some funds for other big-ticket payments
When consolidating debt, you have the chance to change the payment terms. As you transfer your balance into a new credit account, you can opt to have a lower monthly payment by getting a longer repayment plan. Some people may argue that this will cost you more in the long run. That may be true, but if you can get a lower interest rate on the new credit account, it will not cost you a lot of money. Not only that, it is better to have it this way than to live miserably because your budget is too strained.
Once you have a lower monthly payment, you have some room in your budget to look into your other big-ticket payments. You can opt to pay extra towards your house. Or finally, finish your car loan. By eliminating these, you can lessen the stress that you feel about your finances. Not only that, but it will also help improve your credit score.
Paying off several accounts can improve your credit utilization
Consolidating debt can also have a positive effect on your credit score because it can help you work on your credit utilization. As you pay off big-ticket items, you are lowering your balance to limit ratio. When your credit utilization is at 30% and below, you can expect your score to go up. Through consolidation, you can steadily pay off your debts and that can lower your balance eventually. Soon, you will find yourself a few payments away from debt freedom.
Pitfalls when consolidating debts for better credit score
As you are consolidating debt, you need to avoid certain pitfalls that will make your credit score fall. Instead of improving your credit situation, these pitfalls might end up making it worse. To help you avoid them, here are the debt consolidation mistakes that you have to avoid at all cost.
Make sure that you do not add unnecessary charges on your credit
Sometimes, consolidating credit cards can make it tempting to use debt once more. As soon as you see your cards with the zero balance, you get a false sense of debt freedom. It makes you feel like your debt was not really that bad. This can make it very tempting to make credit purchases again. You have to keep yourself from giving in to the urge. If you have to, keep your credit card where it is hard to find. Do not bring it while making purchases. You are not really keeping it forever – just until you have paid off the debts you consolidated.
Losing a much more valuable asset because of non-payment on a consolidated loan
This is actually applicable to those who used the equity of their home in consolidating debt. According to reports, homeowners have been able to meet their payments and stay current. This means there is probably a lot of equity that can be used to consolidate debts. Although this will help you get a lower interest on your loan, it will also put your home at risk. If you cannot pay your loan back, you will end up losing your home to foreclosure.
Consider these pitfalls when you are consolidating debt. That way, you will not compromise the benefits that this can bring to your credit reputation and overall financial situation.