Consolidating your debt really does have a lot of benefits, but it also has a few negative things. The benefits are what you are likely to hear at debt consolidation loan agencies to sell you on the idea of working with them. The negatives aren’t generally mentioned, but are fully present. The goal is to turn the negatives into benefits that work for you.
One of the major problems with a debt consolidation loan is that you will immediately take a credit hit. This may seem strange, because the first thing that you do after getting the loan is pay off all of your old creditors. The problem comes when the loans are reported as paid early, or settled for less than a full price. Because the loans weren’t re-payed in full, your credit shows it.
When credit bureaus calculate a credit score, each loan that is active puts a small penalty on the account. By eliminating all of your current loans and consolidating into one, you lose the penalties that you previously had. This means that consolidating your debt will naturally improve your credit score.
Another helpful feature of debt consolidation is the fact that you can quickly repay all of your debt without asking the creditors to cut you some slack. When you file for bankruptcy, this erases all of your debt, but it also places a mark on your credit report that you aren’t capable of repaying your loans. Settlements end up working the same way. These both show that the creditor might not get their money back from you. When they see a debt consolidation loan, they see that you are an individual that doesn’t need to ask for help to pay your bills. You can be lent money, and it will be returned. You still owe the same amount of money, so it won’t even factor into your credit score.
Another method of consolidating debt that can help you improve your credit score greatly is partial payment consolidation. The general idea is that the borrower would pay off all of the newest accounts. He would then pay for any older accounts to be brought back into current and active status. By simply paying for the older accounts, and paying off the consolidation loan, this individual would see their credit score rise quickly. This is a great benefit to getting out of debt.
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