According to a study released by TransUnion, most of the debtors have experienced credit score improvement after paying down their credit card debt by taking out a consolidation loan or personal loan. The Chicago credit reporting agency has researched this incident to find out the actual scenario of consolidating credit card debt.
So what was the research result? Does the credit card consolidation really improve credit score? Or, is taking out consolidation loan create more burden on the debtor?
The research revealed that debtors have repaid 58% of their credit card debt and reduced the credit card balances from $14,015 to $5,855 by taking out a new personal loan. After that. They noticed a significant credit score improvement.
How does credit card debt consolidation work?
A credit card consolidation combines your multiple credit card debts into one and arranges a single affordable monthly payment for you. As you keep up with the monthly payments on the consolidated debt, your past dues get cleared and over time, all your debts get eliminated. Do you want to learn how to consolidate credit card debt on your own?
It is very easy. You just need to take out a loan with a low-interest rate and repay all your credit card debts together. Now, you just need to manage the new loan. However, you can consolidate your debts by enrolling in a debt consolidation program as well.
The pros of credit card debt consolidation
Credit card debt consolidation has certain advantages as explained below:
- It assembles your multiple debts into a single one so that you stand less chance of missing out on the payments.
- It creates a predictable monthly payment for you.
- It makes the debt payments more comfortable for you since you can choose the payment plan and reduce the monthly payments to fit your means.
- It reduces the interest rates
Low-interest rate to pay
One of the main advantages of credit card consolidation is that you enjoy a low-interest rate on the debts that you owe. It has been seen that most of the people do not want to pay off their credit card dues because of the high-interest rate charged on their dues. But, with low-interest rates to pay, the majority of the people will be able to repay their debts with ease.
Single and affordable monthly payment
Another advantage of credit consolidation is that you need to make a single and affordable monthly payment against all your outstanding dues. Thus, you do not have to face the difficulty of handling multiple creditors separately.
Opportunity to get rid of debt problems
When you have several credit cards, you swap them altogether whenever you find a shortage of money in your pocket. This is the main reason why you fall into credit card debt problems. By consolidating credit card debts, you get an opportunity to pay off your outstanding debts and get rid of your debt problems.
Chance to improve your credit score
It is quite natural that when you have multiple credit cards to pay off, your credit score will fall down. You need to take the necessary steps to boost your credit score. But consolidating credit card debts helps to improve your credit score. Thus, you become credit worthy once again.
How does credit card debt consolidation affect your credit?
Due to the reduction of the interest rates on your cards, the maximum part of your payment will be utilized to repay your principal amount. Thus, your debt amount will be reduced soon. This will increase the credit utilization ratio, as a result, your credit score will get boosted.
Also, as you make the payments through debt consolidation, your credit improves as 35% of credit score calculation depends on your payment history. Thus, to improve your credit, you will have to maintain your on-time payments and if you need to close down other accounts, avoid closing them all at the same time.
Consolidating debt affects your credit negatively only when you close down your accounts or if you miss payments on your new loan.
Credit card consolidation just merges several of your debts, so that you don’t have to worry about making multiple payments on each one of them separately. Credit card debts are the most difficult ones to pay off since the interest rates are usually high on them. Besides, if you have incurred more than one credit card debt from different creditors, in spite of having limited financial means, you are going to be trapped into the debt muddle for a long time. A credit card debt consolidation just simplifies the whole process for you, though it cannot reduce your total debt amount by a huge margin.
What to consider before taking out a personal loan or a consolidation loan
Before taking out a personal loan or consolidation loan, try to shop around and find out the best deal for you. Contact at least more than two lenders and take down their terms and policies. Compare the terms and determine which one is suitable for you. Besides, take other factors into account like fees, penalties, and other associated charges.
Also, try to get the loan with a low-interest rate so that you can manage it easily.
Lastly, you have to manage the new loan properly to avoid falling in to further debts. Make sure you pay the monthly payments on time. Also, now onwards, manage your credit cards properly to avoid further credit card debts. To boost your credit score, you need to stay within your credit limit. And, make sure you pay the credit card payments in full and within time. Buy things that you can afford. Otherwise, repeatedly credit card debts can hurt your credit score severely and you may have to work hard to get back the credit health.