Debt consolidation is one of the options people consider to address their outstanding debtsbining all your credit card and other debts into a single, new loan can help you get on the path to becoming debt free. One loan means a single debt payment to contend with every month, not a half dozen or more due at different times. Making one payment each month helps to streamline your debt repayment process and makes it less likely that you’ll forget a bill.
A good debt consolidation loan will also be issued at a lower interest rate than what you’re currently paying direct lender payday loans in Maine on other outstanding debts, too. This helps to eliminate the challenge many borrowers have with minimum payments on their credit cards, as paying the bare minimum each month does little to chip away at the card’s overall balance. The new loan’s lower interest rate reduces the interest expenses accrued on the outstanding debt over time, which decreases the rate at which the principal is building up.
When considering debt consolidation, one issue to worry about is how any new loan will affect your credit. Requesting a debt consolidation loan and taking on additional debt will almost certainly affect the way credit-reporting agencies view overall credit worthiness. The loan itself, and how you put it to use, can have an impact on your credit as well. Let’s look at the impact debt consolidation loans can have on your financial situation and determine whether a debt consolidation loan hurts or helps your credit.
So, How Is Your Credit Anyway?
Prior to choosing an option such as debt consolidation to address your outstanding debts, you should assess the current state of your credit. Three primary credit-reporting agencies compile and monitor consumer credit data: Experian, TransUnion, and Equifax. Lenders use this data to make decisions about whether to extend credit to prospective borrowers. In some cases, how these credit-reporting agencies assess your credit rating will limit the options available to deal with all your outstanding debt.
You can order a free credit report every 12 months to assess the status of your credit. Many banks and financial services companies also offer free, real-time access to your credit score as well. You should make use of these services, especially when you’re considering a debt consolidation loan. Reviewing them after you’ve been paying on your debt consolidation loan for some time is useful as well, since it’ll help you assess the effects your loan is having on your credit.
Reviewing your credit report prior to applying for a debt consolidation loan can actually help protect your credit. Your credit may not be good enough to quality for a loan, and finding that out ahead of time can stop you from needlessly applying for one, which can impact your credit score (as we’ll discuss later). Additionally, if you determine that a debt consolidation loan isn’t currently feasible, you can start working to improve your credit so you can apply for a loan later, or select a different option to start addressing your debt today.
The Debt Consolidation Loan Application
If you decide to obtain a debt consolidation loan, the first thing you’ll have to do is apply for one. When you do so, the lender will likely initiate a hard credit inquiry. A hard credit inquiry is a formal review of your credit rating. Each credit inquiry that’s performed can cause a slight decrease in your overall credit score, and multiple inquiries on your credit, or multiple loan rejections, can lower your credit score significantly.
The free credit check discussed earlier is really worth your time here. Order a credit report and read it prior starting the loan application process as you prepare to shop around for loans. If your credit rating is problematic, you should attempt to improve it before applying for any debt consolidation loan. If you have poor credit, consider other options to deal with your outstanding debts, such as the debt settlement services that National Debt Relief offers.