Will debt consolidation hurt my credit?
Posted by Financial Advisor | Filed under Debt, Loans & Mortgages
With business so slow due to the economy I am seriously considering using a debt consolidation company if my creditors can not reduce my monthly payments. Will this hurt my credit and how badly? Also, could anyone recommend the best consolidation company out there and any tips you might have? Thanks…
What do you mean by Debt Consolidation? Are you going to get a single loan for the total amount of your debts to pay them all off then make regular payments on your new loan? This would not hurt your credit. In fact, it could help.
Or, are you going through Debt Counseling? If you are, then they will request you stop paying your bills (regardless of your credit score) which will make you have lots of late payments and hurt your credit bad.
Debt Consolidation can mean several different things, there's:
1) Debt consolidation loans, where you consolidate all your credit card debt into one loan. You have to be very careful with this method…once your credit cards are paid off by the loan it's simply too tempting to start using all that available credit again, and you soon end up with twice as much debt as when you started. If you do this, cut up your cards after they are paid off to avoid this temptation
2) Debt settlement: STAY AWAY from any "debt consolidation" program that involves debt settlement. Debt settlement is a risky tactic where you pay a monthly fee to a debt consolidator….this entire fee goes towards building a settlement account and to the consolidator's fees to “settle” your accounts in the future. Your credit card companies will deliberately not be paid so that all the accounts will default/charge-off so that they can attempt settlements at around 50%. If you are current on your accounts, this process will ruin your credit rating for sure. Debt settlement is like a roll off the dice with your finances…You can never predict how your creditors will respond to the deliberate defaulting of your accounts…they might settle at 50%…or they might serve you a summons, take you to court…and if they win, you could be looking at wage garnishment.
3) Entering a Debt Management Plan (DMP) with a non-profit credit counselor like CCCS (Consumer Credit Counseling Services). They can negotiate lower payments and interest rates. They do not negotiate settlements.
They will require you to stop using all credit and to cut up your cards. Your credit report will be updated to "enrolled in debt management." This does not damage your credit, but it may make it impossible to obtain new credit while you are enrolled in their program….so don't use this service if you anticipate applying for a new apartment, car loan or mortgage anytime soon, as you would probably be denied while you're enrolled in the CCCS debt management program…. Otherwise, it can be a very good way to deal with your debt.
There is a chance that using debt consolidation services might affect your credit. Most debt consolidation services are there to help you get out of debt, not to sustain your credit report or credit score, so you should prioritize what you really want in seeking debt consolidation help.