Debt Reduction Help

Debt consolidation, otherwise known as debt management is a term used to describe an array of services that are offered by a number of private companies, and bank cards, in order to help to reduce interest on your debt. They work through prearranged deals with credit card providers, or through an offer by a single provider and often under the stipulation that your account will then be permanently closed while it is being paid off.

One of the most common questions asked is whether debt consolidation will lower your credit score. The answer, actually, is not quite so simple and depends upon your credit background, which would make this service more or less appropriate depending upon your circumstances and the type of consolidation.

Let’s say you have about $10,000 in total unsecured debt. Now break it down a bit more, $1000 is unpaid medical bills, $8000 on a credit card, with perhaps a final $1000 on a car loan. Consolidators generally will only work with credit card debt, though some will help with student loans as well, but that’s complex and beyond the scope of this article. Out of the 8K in credit card debt is there anything current, that is, in no way past due; paid for on time generally with maybe only a few late payments at most? If that is the case you may want to negotiate directly with the creditor as it’s always better for your score to keep active positive lines open, especially if there is a long history; or simply choose not to add that card to a consolidation type which would close the account. Now add the card debt together that is significantly delinquent, that you are no longer able to utilize or is entirely maxed out. Closing accounts that are in poor standing will have a less detrimental effect on your credit score, ultimately once they are paid off, will become less significant to the rating overall.

One factor in calculating the credit score is a debt to available credit ratio; this is a calculation of the amount of unsecured credit you have access to versus how much you currently owe, generally closing an account will have a detrimental effect on the credit score (since your debt to available credit is infinitely higher as its paid off), however, if the interest is high and you are not able to negotiate with the creditor further accumulated interest and debt, especially if it is over the credit limit can have a worse effect. The debt consolidation agency in this case may have better luck in negotiating your interest rate accordingly. Some will also attempt to settle the debt for a portion of the amount owed. While the latter will often put a red flag on your credit report, it is preferable to keeping the account delinquent or over the limit, not to mention to the debtor’s peace of mind. Over the course of time that route may enable the person to rebuild their credit, potentially at a far more rapid pace than they otherwise would have accomplished.

Another type of consolidation usually requires a high credit rating, though generally not the case for people pursuing some forms of consolidation, worthy of mention. For those who are able or have someone willing to be of assistance, many credit cards offer a high balance low interest balance transfer offer when signing up for a new card. In some cases it’s possible to transfer a balance and have the interest waived entirely for two years. Many banks offer personal loans at lower interest rates than credit cards as well. It is important to always read the fine print though, some things that seem too good to be true indeed are.