Millions of consumers in the US incurred insurmountable amount of debt after the recent recession. In this situation, debt negotiation is a viable option for the debt stricken consumers to eliminate their financial woes. But many people are under notion that debt consolidation lowers your credit score. Your credit score might initially drop but once you start paying off the debts then your credit score will increase eventually. But you need to review the debt relief programs before taking it.
The counselors associated with the debt consolidation firm will review your financial situation before formulating your repayment plan. Debt consolidation is a viable option for debt laden consumer as you do not damage your credit score. The debt arbitrators will negotiate with the creditors to lower the interest rate on the outstanding balance to make it affordable to pay off.
What are the disadvantage of debt consolidation?
There is a mushrooming growth in the scam companies that target vulnerable consumers to extract money. If you are associated with a scam debt consolidation then your credit score might drop. The fraudulent company might take money from you to pay off the debts but they put the fund in their own bank accounts instead of pay off the creditors. Therefore, if your bills are not paid then your credit score might drop considerably.
Another disadvantage of debt consolidation is that when the debt arbitrators negotiate with the creditors to lower the interest rate then you pay less than you actually owe to the creditors. The creditor reports the account as “settled in full” rather than “paid in full.”
What is effect of the debt consolidation on your FICO score?
When you consolidate your debts then your credit rating improves as you pay off your debts on time. But if your account is closed then it might damage your credit score. When you close the account then your available credit drops but the debt balance remains on your credit report. Therefore, it is advisable not to close the older accounts.
What are the types of Debt Consolidation?
The debt stricken consumers can transfer the high credit card balances to a low interest card to make it affordable to pay off. You can also take out a home equity line of credit to consolidate your debts. Your credit score will not drop if you take out a home equity line of credit for debt consolidation.
