More American homes have high balances on their credit cards today than ever before. People are starting to feel forced into getting creative when it comes to credit card consolidation and other forms of debt relief. One strategy, debt consolidation, can help people organize their debt and make the payments lower and easier overall. However, it can be scary. You will want to know how to consolidate credit card debt without hurting your credit or other financial areas of your life. Here are some things to understand.
How Debt Consolidation Works
If you want to work on credit card consolidation, you contact a reputable loan company and get enough of a loan to cover the debt you have on all of the credit cards. Once you receive those funds, you distribute them to the creditors so you no longer have a balance on your credit cards.
All you have left to pay is the loan on a monthly basis. If you are careful about the loan you get, you should have a much lower interest rate on those payments than you would on the credit cards. That can help make the monthly payment more affordable and the loan, overall, will cost you less than the card payments would have.
How Credit Card Consolidation Can Hurt Credit
There are several things you can do during the process that could hurt your credit. If you can avoid doing those things, you can actually improve your credit. When you pay off the credit cards with the loan sum you have received, you might be tempted to close those accounts.
However, if you do that, your credit score will be impacted in a negative manner. Instead, pay off the balances and leave the accounts open. You can cut up the cards or simple avoid using them so you don’t get into more debt trouble. But keeping the accounts open and the credit a possibility helps your credit score overall.
The Hard Credit Inquiry
Often, when you apply for a loan, the lender is going to perform a credit check. These checks might lead to a hard inquiry, which can sometimes lower your credit score by as many as 10 points. This inquiry will only impact the credit score for one year and often, if you are in credit card trouble, that temporary drop is well worth it. Learn more about the credit inquiry process from your lender and feel open to asking questions whenever you have them.
Paying That Loan Helps
Once you have the credit card consolidation completed and you have only the loan payment left to make, you will want to make that payment on a regular basis. Paying that loan is a strategy that can actually help to improve your credit score. It’s another good reason to get consolidation done. You are able to pay the loan and you are proving to creditors that you can make your payments and handle your bills, which will help your scores improve over time.
Other Changes To Make
If you decide that credit card consolidation is in your best interest, you are going to want to make other changes to make sure your credit score doesn’t drop any more than it might from the process. For example, you need to get yourself on a budget and stop overspending on the credit cards.
You only want to spend what you can pay off on a monthly basis. The budgeting process can help you to stay on track in paying down your debts and keeping your finances on track. If you stay on the same path, your debt will only get worse and your credit score likely will go down.
It’s wise to think about how to consolidate credit card debt without hurting your credit so you can get in the best financial shape with this process.