Is Debt Consolidation Bad for Your Credit?
Usually. Borrowing money upsets the debt-to-income ratio which, in most cases, is the most important component of a credit score. Furthermore, borrowing money to get out of debt (robbing Peter to pay Paul) is usually not a good idea. Therefore, debt consolidation loans also demonstrate poor financial sense. Furthermore, debt consolidation loans don’t alter poor financial habits, which is probably what caused the trouble in the first place. Loans simply give people more money to spend.
However, in some cases, a debt consolidation loan may be the best way to reduce debt and improve credit scores, especially if a Chicago debt consolidation lawyer is a partner in this process. Attorneys know where individuals with poor credit scores can obtain loans at reasonable interest rates, and attorneys negotiate for borrowers to obtain the best possible terms. Furthermore, a Chicago debt consolidation lawyer gives borrowers ongoing advice about how to best use these loan funds.
How Debt Consolidation Works
The idea behind debt consolidation is simple. You take multiple unsecured debts and combine them into one, ideally with a lower interest rate. The most common ways to do that include a debt consolidation loan and a balance transfer card.
Additional debt consolidation options include a home equity loan or line of credit (HELOC) and a 401(k) loan. Bear in mind that with these loans, you’re borrowing against your assets to pay off unsecured debt, which as mentioned, is generally not the best idea.
Consolidating your debts with a balance transfer credit card works similarly to a loan. If you carry a balance on one or more credit cards, you can move that debt to a balance transfer card with an intro 0 percent APR offer, usually for a fee of between 3 and 5 percent of the transaction amount. This will allow you to pay the balance without interest charges for a specified period.
How Debt Consolidation Affects Your Credit
If you do it right, debt consolidation might slightly decrease your score temporarily. The drop will come from a hard inquiry that appears on your credit reports every time you apply for credit. But, according to Experian, the decrease is normally less than 5 points and your score should rebound within a few months.
Then, as you keep paying off your debt, your credit should go up since you’ll be improving your credit utilization ratio, or how much of your available credit you’re using. The lower this ratio is, the better.
When you combine your debts into one, you’ll likely find it easier to manage your repayments, especially if the interest rate of this new loan is lower than the rates on your original loans. This is especially true if the interest rate on the new loan is lower than your original interest rates, or if you’re using a balance transfer card. Naturally, you might feel tempted to continue using your credit cards now that your debt seems less of a worry.
But that would set you up for a world of hurt. If you keep adding to your debt, you may find it has become hard to stay on top of your payments again. Slipping and missing even a single payment can cause significant damage to your credit. Further, late payments stay on your credit reports for seven years. As a result, you risk ending up with even more debt and a lower score.
A Chicago debt consolidation lawyer helps with targeted strategies, such as preparing and adhering to a budget and knowing what debts to pay first.
Rely on a Detail-Oriented Cook County Lawyer
No matter what kind of financial problem you are having, bankruptcy could be a way out. For a free consultation with an experienced debt consolidation attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Virtual, home, and after-hours visits are available.
Source:
consumerfinance.gov/ask-cfpb/what-is-a-debt-to-income-ratio-en-1791/
