Consolidating debts may affect your credit score, with this, it’s essential you know the best Way to Consolidate Debt without Hurting your credit. This becomes an option when you have multiple debts to pay and prefer a fixed monthly payment.
But you need to be careful when you want to do this so it won’t affect your credit score. This article will give you tips on how to go about it. So, read to the end.
Best Way to Consolidate Debt without Hurting Credit
Having many debts to pay off can be very frustrating. This is worse when you are in a bad financial situation. Debt settlement is a good way to help you out of debts but it does not guarantee that they are totally erased. The best way to go about this depends on your financial situation and what you prefer.
For some individuals, the best way would be to pay off the smaller balances first. But this does not work for everyone as the debts may be much. Before moving on to the best ways for debt settlements, you should know how its works. So how does debt consolidation work? Read on to learn how.
How does Debt Consolidation Work?
The term “Debt Consolidation” refers to a process that borrowers use to settle their debts. It involves merging multiple debt accounts into one account. This new account is usually opened with a new lender.
You will be required to request a loan and the amount should be equal to what you owe on your current debts. When you get approval for the loan, you use it to pay off other debts. With this, you only have to pay off the new loan. You can take out a personal loan or Home equity loan.
One of the main reasons why this is important is that it can help you get a lower interest rate. Also, it helps you simplify your monthly payments.
How to Consolidate Your Debt Without Hurting Your Credit
Before you think of settling your current debts, you should calculate the total amount you owe. Calculating the total amount, you owe will help you determine how much you need to borrow to settle it. So, how do you go about this without hurting your credit? Discussed below are some of the best ways to manage your debts.
Ask your Family Members or Friends for Help
You can seek financial help from a family member or friend to pay off your debts. However, this should be done with a commitment to pay back the borrowed money on the agreed date. This is helpful as you don’t have to bother about meeting eligibility requirements required by traditional lenders.
Also, you are not under any loan term when you ask friends and family for help. On your part, ensure you use the borrowed funds wisely and pay on the due date as you wouldn’t want to destroy the relationship you have with your lender.
Get a Balance Transfer Card
When you get a balance transfer card, it can also help you consolidate your debt. When your open a balance transfer credit card account with lower interest, you can transfer the balances of the high-interest older cards to the new account.
Before you do this, ensure you carry out thorough research on the balance transfer fee, the interest rate on the transferred balance, the annual fee, and how long your promotional period is. If you have a bad spending habit, this is not a good idea.
Use Debt Management Plans
A debt management plan is simply a type of loan repayment plan that is organized by a credit card counseling agency. This is a method used by debtors to manage their unsecured debts. You can sign up for a debt management plan with a nonprofit credit counseling agency.
With this, you make monthly payments directly to the agency and they will pay your lenders in turn. Ensure you sign up with a Certified credit counseling agency. This agency will work with your lenders to reduce the interest rates and other fees attached to your loan.
Apply for a Personal Loan or Home Equity Loan
Getting a Personal or Home loan can help you settle your debts. When you get the loan, you will be able to pay off your outstanding debt. When getting a Home loan, be careful as your home equity will be used as collateral. If you default payments, your home equity can be seized.
Create a Budget to Pay off your Debts
If you can pay off your debts on your own, you may want to consider creating a good budget to pay off your debts. The budget you create should be realistic, and what you can meet up with. After creating the budget, focus on paying the debts. Also cut down unnecessary expenses and channel the money towards the debt you owe.
Ensure you stick to this budget until you are done paying off the debt. Note that the best option for you depends on your financial situation and preferences. So, what works for you may not work for another individual.
Is Debt Consolidation a Good Idea?
Debt consolidation is a good idea when you prefer fixed monthly payments. If you have a good to excellent credit score and you have good spending habits, you may consider it. Considering the Lower interest rate attached to debt consolidation, it may be a good idea for you.
Does Debt Consolidation Affect your Credit Score?
Yes, Debt consolidation can affect your credit score but it is only temporary. If you manage your bills responsibly, the impact on your credit score will be temporary.
If you are opening a new card account to consolidate your debt, it may lower the average age of all your accounts thus lowering your score. Using balance transfer cards can also raise your credit utilization ratio and a credit inquiry impact your score.
How Long Does a Debt Consolidation Stay on your Credit?
When you consolidate your debt, it can remain on your account for up to seven years. This also depends on your credit score after the debt settlement. Having known this, its best you use one of the best ways to consolidate your debt.
Can I Buy a House after Debt Settlement?
Buying a new house after debt settlement is not a good idea. This is because debt settlement stays on your credit profile for about 7 years. It’s best you perfect your credit before you think of acquiring a new home. If you want to buy a new home, you can plan for it and purchase it with time.