Debt Consolidation and How it Impacts Your Credit Rating

Holly Bentz

Debt is not a high commodity. Across the universe, people are not looking for a place to sign up for more debt. In America, over 30 million consumers’ credit scores teeter under the score of 620. Nonetheless, personal debt can be a debilitating situation. Although, getting a forty percent job raise job or winning the lottery are the ideal ways to solve a person’s financial woes, there are other immediate solutions.

Since credit scores represent purchasing power, improving one’s rating is critical. There is a direct correlation between the interest rate a homebuyer and car buyer will pay. In other words, a low credit rating represents a high interest rate financing. On the contrary, a high credit score symbolizes buying power. Particularly, for the person planning a significant purchase like a home or new automobile – beefing up one’s credit rating is a consumer smart strategy.

Over the years, debt consolidation loans have been the leading way Americans have been able to quell their personal financial challenges. Just as all financial institutions are not equal, the same is true of debt service organizations. Nevertheless, the right debt consolidation company can impact credit in a positive way.

Fact: Since bills are immediately paid, a credit scores can be raised via a debt consolidation loan.

Here are five steps to upgrade your credit rating and identify whether debt consolidation is right for you:

Request a Copy of Your Credit Report

Before you opt for a debt consolidation firm, it is a good idea to review your credit report. Since a credit score can be tarnished by false information, it makes the best sense to obtain a copy of your credit report. There are three reporting agencies that will provide a complimentary credit report (Experian, Equifax and Trans Union). Legally, Americans are entitled to one complimentary or free credit report per year.

Fact: Payment history accounts for 35 percent of all credit scores. A monthly late payment can reduce a credit score between 50 to 100 points.

Calculate the Total of Bills Owed to Your Monthly Income

Identifying how much you owe in your current monthly income is the second way to determine whether a monthly budget versus debt consolidation is necessary. If the total amounts of your bills exceed fifty percent of your monthly salary, debt consolidation offers a surefire way to rapidly raise your credit score.

Devise a Payment Plan

As financial institutions and credit card issuers report the outstanding balance of consumer’s bills to credit bureaus, the minimal amount paid does not help augment a credit rating. As a result, it is best to pay off bills entirely.

It’s a perfect example of how using a debt consolidation firm may immediately improve a consumer‘s rating.

Fact: Paying bills on a timely basis is the key way to raise a credit score and rebuild a credit rating.

Pay-Off Bills

When financial and lending institutions evaluate and approve credit, they prefer to see low debt balances on credit cards. The wider the gap, the better the chance for gaining approval of a low interest rate. (It is particularly important for the consumer in dire need of raising their credit rating over 620).

Debt consolidation offers a quick remedy. Since debt consolidation companies negotiate interest rates to be waived, a consumer has the ability to pay their bills faster. Consequently, a credit score can be augmented rapidly.

Credit score boosting strategy: Consumers can raise their credit rating by charging less and paying the entire balance each month.

Avoid Bankruptcy with a Debt Consolidation Loan

Bankruptcy is the antithesis of debt consolidation. As simple as bankruptcy may seem, it can devastate any credit score. Not to mention, the effects of bankruptcy last between ten to 13 years. In recent news, the United States federal government has revised legislation regarding bankruptcy. As a result, filing bankruptcy carries many stringent requirements.

Fact: Bankruptcy will drastically lower a credit rating by 200 points or more.

On the other side of the personal finance spectrum, debt consolidation loans feature a rapid means for getting out of debt. Since all bills can be paid off – entirely, a credit rating can be easily elevated. As buying power is impacted by credit worthiness, consolidating debts via a loan is a smart way to beef up your credit score.

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About The Author

Holly Bentz is a finance writer and a contributor to About Personal Loans.

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