Use the Right Medicine to Consolidate Debt Without Ruining Credit
True, some debt consolidation programs negatively affect your credit; however, it is nearly impossible to ruin your credit when consolidating debt. The simple reason is that the state of your credit influences the type of available debt relief options open to you.
If you have good credit and income, then you can find easy solutions to consolidate your debt without ruining your credit. However if you have large debts, trouble making payments, or worse, late in your payments, then you have already ruined your credit. Consolidating debt without ruining your credit is a moot point.
In short, the more trouble you are in, the greater your credit has been damaged. It will take a stronger pill, with more side effects to solve your credit problems. However, it is not the medicine that ruined your credit health.
In order to understand how debt consolidation and credit mesh, learn about:
- The Basics of your Credit
- Debt Consolidation for Good Credit
- Debt Consolidation for Bad Credit
The Basics of Your Credit
Your credit is based on how much debt you take out and how you pay it back. Lenders look at two major criteria before granting you a loan or credit card:
- Credit Score: Your credit score reflects your credit history. The FICO score is the major score used. The two major components are timely payments and credit utilization. In other words, are you making your payments on time, with no late or delinquent accounts? Do you max out your credit card accounts? If you answer yes to either of those questions, then you have damaged your credit score.
- DTI (Debt to Income) Ratio: Your debt to income ratio reflects your total monthly debt payments, including your mortgage (or rent) and your monthly credit card, auto, and other installment or revolving credit accounts divided by your monthly income. Different lenders use different standards. Is your DTI over 45%? If so, then you will find it difficult to get a mortgage loan. Some lenders have stricter requirements. Remember, the higher the risk you pose to the lender, the higher the interest rate the lender will charge you.
Debt Consolidation for Good – Excellent Credit
If your credit is good to excellent, then you can consolidate debt without ruining your credit by one of these methods:
- Balance Transfer: Move your high interest cards to a lower interest rate card. Be careful not to max out your balance and watch out for high fees, which make balance transfers an uneconomical option.
- Debt Consolidation Personal Loan: Consolidate high interest debt with a lower interest rate personal unsecured loan. You have to have excellent credit to get a low interest rate personal loan (and not all that low).
- Cash out Mortgage Loan: If you also have equity in your house debt consolidation through a cash-out refinance (or home equity loan) is an excellent way to lower your interest rate and monthly payments, although if you take a long-term loan your overall financial costs increases.
Debt Consolidation for Bad Credit
Bad Credit can be due to bad personal financial habits. Generally, overspending and not keeping a budget are two bad habits that go hand in hand. Bad credit can also be due to sudden emergency costs (medical bills or emergency auto repairs) or a sudden loss of income. No matter what the reason for bad credit, you need to find the right pill, sometimes bitter, to help you deal with your debt problems.
Avoid the temptation to take out loans for bad credit. In any case, those loans are just stopgap measures and not debt consolidation loans. You pay off one bill, but replace it with a more expensive one. Two debt consolidation options to explore are Credit Counseling and Debt Settlement.
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Credit Counseling and Debt Management Program (DMP): If you are struggling to make your payments, then making a budget and financial plan is a good start. A professional credit counselor will go over your finances, and create together with you a workable budget. If you can make fixed payments, then a Debt Management company will negotiate lower interest rates and fees with your creditors. Instead of making payments to all your creditors, you make one payment to the DMP who then funnels the money to the different creditors. In principle, your payments are made on time, although the transition period sometimes involves late payments.
The general consensus is that your FICO score is not damaged, since your payments are made on time. However, if your credit balances are cut off, then your score might be temporarily damaged. In addition, your credit report may include a notice of being in a credit counseling plan, which is a negative mark for your creditors. Since your credit is already damaged, your chances of getting new credit are slim. As you pay off your debts, your credit score and DTI ratio will improve over time. It takes about five years to complete the program, so plan your purchases accordingly.
Debt Settlement: If your credit is on the verge of crashing, or already crashed due to late payments, and/or charge-offs, then debt settlement may be the best debt consolidation solution. You will receive a free consultation, including a thorough analysis of your financial situation and possible debt relief solutions. In a debt settlement program you stop making payments to your creditors and make payments into a special designated account, held in your name. The debt settlement company negotiates a settlement with your creditors. A reputable firm takes a fee only after successfully negotiating a settlement. Settlements vary, and there are no guarantees of the success, although they can be very substantial.
Your credit score is definitely hurt, after all you stop making payments to your creditor. But, ruined? By dealing with your debt problems, you are on the path to healing your situation. You already couldn’t afford to pay and collection calls. If left unattended you will face lawsuits, court judgments, wage garnishments, bank levies and liens. Going from bad credit to very bad credit, doesn’t really make a difference. No creditor was looking at you with open arms. By getting debt free you have set yourself up to vastly improves your credit score.