For those looking for a way to break free from the confines of mounting debt, few approaches are as beneficial, and indeed as powerful, as using debt consolidation. Some debt consolidation solutions are run by companies, others by government run programs and yet others are run by nonprofit organizations. However, for the most part, debt consolidation can be run by individuals themselves. This would entail securing a debt consolidation loan with a bank, credit union or other financial institution.
However, the biggest concern individuals have about consolidating their debt is whether doing so will adversely affect their credit rating. While on the surface it would appear that consolidating debt might reduce someone’s credit rating, it actually doesn’t impact it that much. In fact, in most cases the individual’s credit rating remains as is. So, for those looking to combine their debt, and concerned about what it means to their credit rating, we’ll review why it likely won’t impact it at all.
Combining debt allows individuals to finally enact a strategy to eliminate their debt for good. It works by combining the debt from multiple credit cards & creditors into one large sum. Next, a payment plan is worked out where the individual can make monthly payments to one source or loan. Individuals concerned with how it will affect their credit rating must remind themselves how creditors will see the consolidated loan.
First, those creditors will in essence be paid in full. The individual’s credit report will recognize those debts as having been paid. The new consolidation loan will have a set schedule of payments. Individuals agreeing to the payment plan must be able to make those payments. The benefit is that it allows individuals to reduce their debt over time, while also being able to save for their future. Therefore, consolidation shouldn’t impact one’s credit rating, if and only if, they adhere to the following steps.
1. Continue making payments:
Any missed payment on a consolidated loan can immediately impact the individual’s credit rating. This is why it’s essential the monthly payment plans & schedules are affordable and easy to maintain.
2. Not closing accounts:
Once those outstanding debts are consolidated, it’s essential they immediately be closed. Otherwise, people run the risk of using that credit and defaulting on payments, which will definitely impact their credit rating.
Debt consolidation is meant to finally end debt once and for all. This is only possible if the individual consolidating their debt understands that it means the end of their reliance on credit. This requires they close their other accounts. In some cases, the conditions of the consolidation program will stipulate that these credit sources be closed. Regardless, it’s still an essential best practice for those individuals who manage their consolidated debt themselves. When properly managed, consolidating debt will not affect one’s credit rating provided the payment plan is adhered to and that all other credit sources are closed.
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