Many people think credit card consolidation is a negative thing and people should always avoid it. However, the actual story is different. Credit card consolidation can practically hurt or improve your credit score. But it’ll depend on how to consolidate credit card debt on your own and how you would manage your finances after that. http://www.consolidatecreditcard.org/
Credit card consolidation is actually a streamlined method where you are able to combine several credit card debts into a low-interest single monthly payment. By following this method, you can reduce your number of debt payments in a month and pay off your debts faster.
There are 6 prime credit card debt relief options you can opt for.
Each of them is unique and useful to pay off credit card debts totally. The options are as follows:
- Taking out a personal loan
- Borrowing money from a 401(k) or IRA
- Obtaining a loan against vehicle or home
- Opting for balance transfer card
- Getting help from a nonprofit consolidation company
- Borrowing money from family or friends
Factors that affect your credit
Like every debt consolidation option, credit card consolidation has some positive and negative effects on the credit score. But before discussing those effects, you should get an idea about the key factors that make FICO scores.
FICO Scores are calculated considering these 5 categories:
1. Payment History – 35%
2. Amount of debt owed – 30%
3. Credit history Including the age of credit accounts – 15%
4. Credit mix – 10%
5. New opened credit accounts – 10%
Apart from the above items, few public records such as judgments, bankruptcies, and collection items also have an effect on your score. It is also notable that if a lender, landlord, insurer or someone else reviews your credit report, it would be treated as a hard inquiry and will be recorded on your credit report. But hard inquiries typically don’t affect your credit score by much.
Now let’s check out how credit card consolidation affects your credit score.
If you opt for the credit card consolidation option to solve your debt problems, it’ll have the following effects on your credit score:
a. Positive effects of credit card debt consolidation on credit score
• If you consolidate your credit cards, you’ll be *left with one monthly payment*. You can easily track your payments and pay them on time. Making on-time payments may help you increase your credit score.
• Through credit card consolidation you can pay down most of your high-limit credit card balances. So, your credit utilization ratio will be automatically reduced. Try to keep it below 30%. Thus, it’ll have a positive effect on your score.
• You may pay off your credit card bills by taking out a personal loan. This way, you are *converting your revolving credit into an installment loan*. Having more than one type of credit account may help you to build your credit.
Tracking
• You can track your monthly payments each month. So, it’ll also help you to plan a monthly budget and manage your finances. Properly managing your finances may help you to get out of credit card debt relatively quickly. Thus, it’ll definitely raise your score.
• The credit card consolidation may help you *pay off your delinquent credit card debts that have gone to collection*. Delinquencies have a negative effect on your payment history and apparently your FICO score. So, paying off your delinquent credit accounts may help you boost your score.
b. Negative effects of credit card debt consolidation on credit score
• Once you have consolidated your credit cards, you might want to start using your balances again. If you *use your freed-up cards too much; your balances will rise again*. So, with the increasing credit card balance, your credit utilization ratio may also increase, thus resulting in a drop in your credit score.
• If you transfer too much credit balances to a balance transfer card that it’s near its limit, your credit utilization ratio may also get high.
• If you apply for a personal loan to consolidate your credit cards, the lender might pull your credit report. Too many credit pulls will add several hard inquiries to your credit report. Thus, it can drop your credit score by few points.
• After paying off your debts through credit card debt consolidation, you might have closed most of your credit accounts. This will hit the length of your credit history and the number of active credit accounts.
That’s not all! Before moving to the credit card consolidation process, there are few things that you need to consider.
These are the things you should keep in mind:
i. Monitor your spending
You should understand the reason why you have incurred so much debt. If the reason is overspending, the credit card consolidation option is not suitable for you. You should at first find a solution to restrict your spending habit. Also, you may have to work hard to increase your income if you want to get out of credit card debt.
ii. Plan a budget
You should plan a budget and analyze how you can pay off your other existing debts like payday loans, medical bills, utility bills, etc. apart from the monthly payment towards credit card consolidation. While consolidating your credit cards, you’ll definitely get a free space on your monthly expenses. But be careful! Don’t use your other credit cards too much, unless you’ll be adding more monthly payment into that free space.
iii. Contact each creditor and ask to lower your payments
This is the main thing you have to do before consolidating your credit cards. You might have multiple credit cards from a single creditor. Request them to reduce your interests and the amount of minimum monthly payments. You may also ask them to waive off late fees or change your monthly due date as per your suitability.
Final words
Consolidating credit card debt will be a wise decision if it helps you to achieve your prime goals. It is true that we need to aim for a higher credit score. But, if the score gets reduced a bit to payoff debts faster, we can give it a second thought. You can work towards increasing the score after getting rid of debt completely.
Guest Contributer
This contribution was written by my friend Aiden of
http://www.consolidatecreditcard.org/ . Anyone that has been dealing with debt, especially credit card debt, has given thought to debt consolidation at least once. Probably lots of times and maybe even daily. Your credit score is one factor that you should be thinking about when considering making that move and I wish to thank Aiden for helping us make an informed descision.
Dave