Debt consolidation can have a huge impact on simplifying your debt management as well as improving your financial situation. It can help you save on interest, allow you to pay your loan faster, and improve your credit as you do that. Are there any negative effects, though? Some people may not be aware of this, but debt consolidation can temporarily have negative effects.
Can debt consolidation affect your credit? The short answer is yes. A new credit account intended to be used for debt consolidation can result in the following:
Be Ready for A Credit Inquiry
When you apply for a new loan or credit, the lender will have to perform a hard inquiry which can knock off a few points from your score. One way to get around this is to shop for loans within a set time period so that the inquiries will be bundled together to avoid too much deduction.
Improvement in Payment History
As you make on-time payments on your consolidated debt, you will gradually see a positive effect on your credit score.
Your Average Age of Accounts Will Fall
When you get a new credit account, the average age of all the credit accounts under your name will be adjusted accordingly. Note that the length of your credit history makes up around 15% of your credit score. This may not be a big factor if you have many old accounts or if your credit score is strong in other areas.
Changes in Your Credit Utilization Ratio
The percentage of the credit you are using at any given time will change if you consolidate credit card debt. This can affect your credit score as your credit utilization is around 30% of your FICO score.
What Are Ways to Consolidate Debt?
You can take a personal loan, apply for a debt consolidation credit card, or get a debt consolidation loan with the help of your home equity.
- You can use a personal loan for almost anything and borrow any amount from a few hundred dollars to thousands of dollars. Most lenders will give you a repayment term of 1 to 7 years, but the interest could be high depending on your credit score and history. If your credit score is less than desirable, you could face dealing with an interest rate that is not much better than what you already have.
- A debt consolidation credit card or a balance transfer card may be limited to just credit card debt or allow for the repayment of other loans. The downside is that it is nearly impossible to avail of this for debt consolidation unless you have a very good credit score. An upfront fee of 3% to 5% of the transfer amount is also expected.
- Using home equity for debt consolidation is a smart option for homeowners. You can do this by applying for a HELOC, getting a home equity loan, or opting for a cash-out refinance. Because using your home equity means the debt is secured, the resulting interest rate will be much lower than other loans and you will benefit a lot as long as you can pay according to the terms you agreed on.
Contact us at Homebase Mortgages if you are interested in tapping your home equity for debt consolidation. Whether you want to get a HELOC, apply for a mortgage refinance, or avail of a second mortgage, we can surely help!