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    How Does Debt Consolidation Affect Your Credit Score

    Disclaimer: Penny Calling Penny is an affiliate website. This means that we get a small commission when you click some of the links in this article. Don’t worry – we’ll never recommend anything we wouldn’t use ourselves.

    Do you know how does debt consolidation affect your credit score? Well, debt consolidation if correctly done, can help you save some money and improve yourcredit score. However, you can only expect to see positive results if you choose the right consolidation method and stick to a consistent repayment plan. Debt consolidation mistakes can dip your credit score and leave you money less in the long run.

    What is Debt Consolidation?

    Debt consolidation is the taking of combining multiple high-interest loans from several accounts into one big single loan to get a better payoff term, such as lower monthly payments or lower interest rates. You can use debt consolidation to cover credit card debt, student loans, or any other liabilities.

    How Does Debt Consolidation Work?

    If you have many different kinds of debts, you can take a loan to pay off all these multiple loans. You can now begin to repay the new debt until completion. Many people with an excellent repayment history and a good relationship with their banks, credit card companies, and credit unions, can apply for debt consolidation through these institutions.

    Additionally, you can engage private lenders or mortgage companies for the loan. Most creditors take up these loans since debt consolidation increases the chances of collecting the money from debtors. Depending on your savings and credit score, you can choose to consolidate your debts in various sensible ways. Bank transfer credit cards are one popular way of debt consolidation, allowing you to benefit from low charges during the introductory periods. This period allows you to save on interest as you take advantage to pay off the debt.

    A Personal loan with low interest is another way to consolidate credit card balances with high interest. Additionally, you can opt for retirement account loans, but you should take care to pay back this loan to avoid penalties and taxes. You can also take advantage of line credit or home equity loans, using your home as collateral with lower interest rates. s when you keep up with the outlined repayment plan.

    Pros of Debt Consolidation

    • It allows you to pull all your monthly payments to just one.
    • The interest rate you pay for the new loan is often low.
    • It could also boost your credit score.

    Cons of Debt Consolidation

    • In the long run, debt consolidation may cost more.
    • If you don’t plan your repayment well, it could result in a bad credit score.
    • The payment you will make could exceed the minimum credit card payments.

    Best Debt Consolidation Loans of 2023

    We have compared and surveyed lenders and financial products to help you decide your finances. We have fact-checked this information to guarantee accuracy. When considering debt consolidation loans, go for loan amounts that fulfill your needs, low-interest rate, workable repayment conditions, and affordability in terms of fees. Consider some of the best debt consolidation loans of 2023.

    1. Lightstream

    LightStream’s debt consolidation loan allows you to choose your repayment terms and funding date. Their monthly interest is low, enabling you to begin saving immediately you consolidate. They do not have pre-payments, appraisals, penalties, or fees. The Rate Beat Program ensures you are not over-paying interest. The repayments are constant, enabling you to plan for the bill. LightStream’s process of getting the loan is swift, meaning you can get the money you applied for the same day.

    2. Payoff

    Payoff offers low-interest rates than many credit cards, in addition to offering customized loan terms that match your financial abilities. They offer you a single, fixed, and affordable amount you need to pay every month to help simplify your life. You already know how much you will be paying at the beginning of the month since this figure does not change.

    Payoff’s debt consolidation plan can help improve your credit score by over 40+ points. The team is fantastic and ready to listen and help you throughout the journey to complete your payments.

    3. Marcus

    Marcus is a branch of Goldman Sachs Bank, offering faster debt consolidation loans to citizens of the United States. They do not charge any fees and accord you low-interest rates for consumers with good credit records.

    If you have a credit score of 660 or higher, you are confident of quick loan approval. They also consider such factors as a debt-to-income ratio (DTI), income, and employment status. Marcus has a support team to help you evaluate the right loan to help you out of debt.

    4. Upgrade

    The Upgrade enables you to apply for your loan online, presenting you with rates to choose from with no impact or obligation to your credit score.

    You will be able to review multiple loans and decide which option is best suited to your debt consolidation goals. After accepting the offer, your money is wired to your account within a day upon clearing necessary verifications to allow you to begin clearing the consolidated debts right away. Their consolidated debts can also be customized to suit your goals and abilities.

    READ MORE: How to Get Out Of Debt in the U.S In 2023

    Alternatives to Debt Consolidation

    Though consolidated loans can reduce your interest rate, save your money, and minimize your payment frequency, they may hamper your credit. Taking a loan to service other loans may not be the ideal option. Take a look at the alternatives available for you:

    Refinancing– This term is similar to debt consolidation; however, it denotes acquiring a loan to pay off one old loan. You can choose this option if your finances and credit have upgraded from the last time you borrowed.

    Settlement– Settlement is where the debtor agrees with the creditor to reduce the repayment amount if the money is paid in full. Though this will negatively affect your credit score, it will get the debt off your shoulder faster. Debt Relief– This encompasses both consolidation and refinancing in addition to some level of debt forgiveness. Restructuring– Restructuring applies more to companies and is used in severe situations. It entails a reorganization of the current debt instead of substituting it with a new one.

    Debt Consolidation Loan and the Credit Score

    Debt consolidation can enhance your credit score by lowering credit utilization since having limited credit on your credit card improves your score. It also provides a positive report on your repayment history. The loan improves your creditworthiness when you keep up with the outlined repayment plan.

    Consolidating Credit Card Debt While Improving Credit Score

    Making wrong debt consolidation decisions can significantly cost your money and hurt your credit score. Below are some tips for making sound debt decisions.

    1. Maintain the Paid Account

    Some close the credit card accounts after they pay them off through consolidation, and this could hurt factors that determine a credit score, such as credit mix (the various debts you have), age of your credit history (showing how long you have had credit), and utilization (the more cards you have active the credit available).

    2. Be Diligent With the Payments

    The debt consolidation loan is still a loan with repayment terms that you should honor. Therefore, before taking up a new loan to repay the old ones, budget to see if you will make monthly payments. If you keep up with your monthly payment, your credit score improves.

    3. Compare Various Consolidation Options Available

    Before settling for a specific debt consolidation plan, research the kind of consolidation that fits you based on budget, creditworthiness, and existing debt. The online market places is a good place to get relevant information, helping you compare personal loans. Factors for comparison worth considering include monthly payment, interest rate, repayment terms, and fees.

    How Does Debt Consolidation Affect Your Credit Score?

    Debt consolidation can be an excellent idea to get out of debt, save money and improve your credit score. With proper planning and careful research, you can partner with the right people to help you through your credit card debts. As you consolidate your multiple debts into one big debt for better terms, keep your payment up to better your credit score on your way to financial freedom.

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