Getting in over your head with debt can be an overwhelming situation. If this is the type of scenario you find yourself facing, you may feel like there is no light at the end of the tunnel.
It’s challenging to manage if you are paying several different creditors each month. For one thing, your cumulative monthly payments will be higher—and it is much more effort to work out the placement of when to send in payments.
At this point, maybe you’ve wondered about consolidating your debt. However, before you do, it's worth considering whether or not this move will help or hurt your credit.
If you've been asking yourself, 'Will debt consolidation fix my credit?', it's time to take a closer look and see how debt consolidation plays a role (or doesn’t) with credit.
The Benefits of Consolidating Your Debts
You can consolidate your loans through either a balance transfer credit transaction or a debt consolidation loan. When you opt for either of these methods, the benefit is that all your debts will be put on one card. This makes your total monthly payout lower—and, therefore, more manageable.
When you have several outstanding debts, each creditor calculates your minimum monthly payment based on your current balance and interest rate.
How a Balance Transfer Works
- A balance transfer works by taking all the debts from your credit cards and transferring them to one card. This lowers your total payment.
- Often, creditors will mail out balance transfer promotions for new customers and offer a 0% interest rate for a limited time.
- This is attractive since it gives you some time to pay down your debt without any interest. However, you need to ensure the rate isn’t extremely high once the promotion ends.
- When getting a balance transfer, the lender will need to perform a hard inquiry on your credit. This can lower your credit score by a few points.
- However, it should bounce back up in a few months since the reduction was not due to late payments, charge offs, or other credit-impacting behaviors.
If you’re planning on making a large purchase right away, you might want to hold off on undertaking a balance transfer until after the purchase. That way, you'll get the best interest rates on your purchase.
The other way that a balance transfer can negatively impact your credit is by increasing your credit utilization ratio. Lenders like to see that ratio stay below 30%, so working with your Certified Credit Diva can help you assess whether that might happen if you decide to make a transfer.
How a Debt Consolidation Loan Works
If you're still asking, 'How can I fix my credit?', you may want to consider a debt consolidation loan. A debt consolidation loan is like a personal loan; in that way, it is helpful for those who may have a slightly lower credit score to start with.
You usually won’t get the introductory promotional offers for 0% interest like you will with the balance transfer. However, you will get access to a lowered rate that remains steady, offering easier-to-make payments each month.
In addition, a debt consolidation loan acts as an installment loan—which means you will be expanding your financial portfolio. This provides a boost for your credit score as creditors like to see a mix of different financial loan types in your portfolio. You can also expect to see an improvement in your credit utilization ratio, potentially raising your credit score.
'Should I Ask for Help When I Fix My Credit?'
The answer to this question is, 'Absolutely!' If you are struggling with a heavy debt load, seeking credit help can help ensure your score doesn’t get damaged during the credit repair process.
At Credit Diva of Dallas, we help people every day fight (and win) their battle with credit repair, ensuring they can access credit and all its benefits. Damaged credit shuts you out of opportunities and costs you added money in fees and interest. You deserve a better life: now is the ideal time to reach out for credit help and repair your credit score!
Get in touch with your dedicated Credit Diva today for more information!