Finance

How Debt Consolidation Affects Your Credit Score

Very few people can stand up to the stress of mounting unsecured debt. Without the financial resources to get credit card debt under control, the individual is left with very few choices other than endure until they find a way to break through. When that opportunity doesn’t arise, the possible solutions narrow in number.

Looking for Options

The first instinct most people have for removing debt is bankruptcy. While that’s certainly an option, it’s far from being a good one. The damage a discharged bankruptcy does to someone’s financial world for upwards of 10 years is tremendously burdensome. Still, it’s an option people tend to pursue in an effort to capitulate and simply start over.

As indicated, there are other options that aren’t quite as destructive as a bankruptcy. Sometimes, a little debt counseling and budgeting is all it takes to get someone back in a line towards paying off their debt within a scheduled timeframe. The problem with this option is it still requires a certain level of cash flow to get things working as intended.

If the extremes (debt counseling and bankruptcy) don’t feel like the right solutions, there is something in the middle ground. It’s called debt consolidation. Let’s take an in-depth look at this option.

What is Debt Consolidation?

When an individual finds themselves dealing with large credit card balances over multiple high-interest credit cards, they have two issues to address. They need to pare down the number of payments they have to make each month as well as deal with the balances and high-interest rates.

A debt consolidation loan affords the prospective borrower with an opportunity to deal with all these issues at the same time. Assuming the borrower’s credit score is no worse than fair, there are debt consolidation lenders that will be willing to help the borrower find the right solution.

Debt consolidation loans allow the borrower to roll most if not all of their credit card and unsecured personal debt into one loan. The loan terms generally range from three to five years, depending on the borrower’s circumstances. Debt consolidation offers the borrower the following benefits:

  • A single monthly debt payment in lieu of having to make multiple payments to creditors
  • Lower amount of cash going out the door for debt payments because of principle consolidation
  • Sometimes, the aggregate interest rate could be lower if the borrower’s credit cards carry a high APR
  • Additional time to pay off debt
  • Stress relief

Debt Consolidation’s Effect on Your Credit Score

If you choose to go this route, you need to be aware there is a downside. Remember, there’s no easy and perfect way to get out from under the debt you have accumulated over time. There is a price you will have to pay and a majority of that price is going to be reflected in your credit score.

Upon approval of your debt consolidation loan from a lender like Americor Funding, you will experience a lowering of your credit score. The amount of the drop will depend on the amount of debt you were forced to include in the loan. Before you get too concerned about this drop, there’s a good chance the drop will be temporary.

Over time, you will have the opportunity to make full payments on time. If you can do just that much, your loan balance will drop and your payment record will improve. As a result of both of these things happening, your credit score will start rising. It’s entirely possible that by the time you pay off your debt consolidation loan. if on time, your credit score will get close to full recovery.

From that point, it’s your responsibility to learn from the experience of recovering from a difficult debt situation. Hopefully, it’s not a situation you will allow yourself to fall into for the rest of your financial life.

If you are currently having difficulty managing your debt, this might be a good idea to consider a lender like Americor funding. There’s no shame in getting into financial trouble as long as you do all that’s possible to recover sooner rather than later.

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