When you're struggling under the weight of debt that never seems to end, consolidating it into one affordable payment can make it easier to manage. However, many people worry that debt consolidation will damage their credit (or make it worse than it already is). Whether this debt payment strategy has a negative impact on your credit score depends on how you handle it. Here are two ways debt consolidation is typically done and the effect each option will have on your credit.
Obtaining a Debt Consolidation Loan
One way of combining your debt is to obtain a debt consolidation loan. Using the loan proceeds, you would pay off all your other outstanding bills so you're left with just the monthly payment for the loan. Essentially, you're shifting your debts from one lender to another but in a way that makes them more manageable.
Generally, debt consolidation loans don't harm your credit. In fact, you typically must have decent credit to be approved for one. Additionally, they can help improve your score because it will be easier to make your payments on time.
However, if you don't have the discipline to avoid using the credit cards you paid off using the loan, you could end up in worse financial trouble than before, which can lead to damaged credit. You can also hurt your credit if you close the accounts you paid off because it may throw your credit utilization percentage off.
Entering a Debt Consolidation Program
Another way you can consolidate your debt is by taking part in a debt consolidation program. With this option, an attorney or debt counselor looks at your finances to determine how much money you can pay per month towards your bills. They then negotiate with your creditors to accept lower payments that better fit your budget. You may one monthly payment to the program and that money is distributed to your creditors.
While there's no risk you'll end up in greater debt like you would with a consolidation loan, there is a higher risk your credit will be adversely affected. Some programs require you to miss payments so that you gain some leverage to negotiate with creditors. Sometimes, creditors will close your accounts or reduce your credit limit to minimize its losses when it discovers you are working with a debt consolidation company.
At the end of the day, though, getting out of debt is the most important things. Bad credit can be repaired eventually, so don't let that risk keep you from doing what you need to do to get rid of your bills.
For more information about debt consolidation, contact a debt consolidation attorney, like James Alan Poe, P.A.