Consolidating your debt really does have a lot of benefits, but it also has a few negative things. The benefits are what you are likely to hear at debt consolidation loan agencies to sell you on the idea of working with them. The negatives aren't generally mentioned, but are fully present. The goal is to turn the negatives into benefits that work for you.
One of the major problems with a debt consolidation loan is that you will immediately take a credit hit. This may seem strange, because the first thing that you do after getting the loan is pay off all of your old creditors. The problem comes when the loans are reported as paid early, or settled for less than a full price. Because the loans weren't re-payed in full, your credit shows it.
When credit bureaus calculate a credit score, each loan that is active puts a small penalty on the account. By eliminating all of your current loans and consolidating into one, you lose the penalties that you previously had. This means that consolidating your debt will naturally improve your credit score.
But if you think about it, this reason really defeats itself. You take a credit hit, but you no longer have so many active accounts creating a negative drain on your credit. So what starts off as a negative effect on your credit will quickly become a benefit. Credit scores can rise quickly when there are no outstanding balances.
Another method of consolidating debt that can help you improve your credit score greatly is partial payment consolidation. The general idea is that the borrower would pay off all of the newest accounts. He would then pay for any older accounts to be brought back into current and active status. By simply paying for the older accounts, and paying off the consolidation loan, this individual would see their credit score rise quickly. This is a great benefit to getting out of debt.
One of the major problems with a debt consolidation loan is that you will immediately take a credit hit. This may seem strange, because the first thing that you do after getting the loan is pay off all of your old creditors. The problem comes when the loans are reported as paid early, or settled for less than a full price. Because the loans weren't re-payed in full, your credit shows it.
When credit bureaus calculate a credit score, each loan that is active puts a small penalty on the account. By eliminating all of your current loans and consolidating into one, you lose the penalties that you previously had. This means that consolidating your debt will naturally improve your credit score.
But if you think about it, this reason really defeats itself. You take a credit hit, but you no longer have so many active accounts creating a negative drain on your credit. So what starts off as a negative effect on your credit will quickly become a benefit. Credit scores can rise quickly when there are no outstanding balances.
Another method of consolidating debt that can help you improve your credit score greatly is partial payment consolidation. The general idea is that the borrower would pay off all of the newest accounts. He would then pay for any older accounts to be brought back into current and active status. By simply paying for the older accounts, and paying off the consolidation loan, this individual would see their credit score rise quickly. This is a great benefit to getting out of debt.