Question 1

How does debt consolidation affect your credit score?

Accepted Answer

Debt consolidation should have a positive effect on your credit score because you must make on-time payments, which count for 35% of your score. It also will reduce the credit utilization that accounts for 30% of your credit score.

The fact that you enrolled indicates that you overspent with credit cards and that is a negative in computing your credit score. Credit utilization is the percentage of spending based on your credit limit. If you have a $1,000 credit limit and charge $500 on your credit card, you have a credit utilization ratio of 50%. Lenders want to see you spend 30% or less of your credit limit each month.

The reason most consumers consolidate debt is because they have maxed-out multiple credit cards, which obviously puts them well over their credit utilization ratio.

The credit utilization ratio only considers revolving lines of credit and not installment loans. Transferring your debts from credit cards to a consolidation loan will reduce your credit utilization ratio and improve your credit score.

Question 2

Can I keep using my credit cards while consolidating debt?

Accepted Answer

Most credit counselors advise you to close credit accounts when consolidating credit. This is a good idea if it stops you from using multiple credit cards to rack up debt. Just understand that your credit score will take an initial hit from closing credit accounts. Length of credit history makes up 15% of a credit score, and the older the credit account, the better it is for your score.

This shouldn’t be an issue since your primary goal should be paying off your debt. Until then, your credit score isn’t important. What’s more important is to make your monthly payments, and, in the future, keep your credit card balance below 30% of the limit. Payment history and utilization ratio account for 65% of your credit score.

Question 3

How to consolidate debt with bad credit

Accepted Answer

It’s possible to consolidate debt when you have bad credit, but you should be prepared to pay more to do so. Bad credit typically means credit score is suffering. Lenders want credit score of 680 or higher to consider you for a good interest rate. Anything below that and you will be paying subprime (aka “high”) interest rates.

Before you apply for a loan, check your credit report and credit score. If it is too low, give yourself time to beef it up by making on-time payments on all your accounts. If you need help faster, ask a friend or relative with a great credit score to co-sign the loan, or ask them to loan you the money themselves.

Other possible alternatives include debt management programs, home equity loans, online lenders.

There is no definitive answer for this because each consumer’s situation has unique factors to account for. Generally speaking, a debt consolidation loan is a good way to pay off credit cards if it reduces the amount of interest you’re paying on your debt and simplifies the payment process.

Question 4

Should I get a debt consolidation loan to pay off credit cards?

Accepted Answer

A debt consolidation loan shrinks your obligations to a single payment to single lender, once a month. If nothing else, it’s makes drawing up and sticking to a budget easier.

The problem comes in doing the calculations necessary to confirm that there also is a financial gain to using a single loan to pay off unsecured debt. That takes time and discipline, but if done properly, you could find out that a debt consolidation loan is not only easier to handle, it’s more beneficial financially.

Question 5

Is it a good idea to consolidate debt?

Accepted Answer

While traditional debt consolidation loans can end up hurting your credit or tempt you to start using your credit cards again once they are paid off, the debt consolidation alternative provided by InCharge has few downsides.

You are getting the convenience of consolidating your debt into one payment, lower interest rates and a path to paying off your debt in three to five years. You won’t be able to use your credit cards after enrolling, so you won’t be tempted to acquire more debt. In summary, yes, it is a good idea to consolidate debt. Get started today by calling or starting online debt consolidation.

Question 6

How do I prepare for a debt consolidation appointment?

Accepted Answer

Before reaching out to a debt consolidation company, take some time to go through the following debt consolidation checklist:

Figure out your total credit card debt: that’s all of your balances added together
Calculate the average interest rate you are currently paying for your debt. Try to find a debt consolidator who will offer you an interest rate that is at least 3 to 5 percent lower.
Add up how much credit card interest you paid last month.
Add up the total of your current minimum payments. If you can’t afford your current minimums, and a debt consolidator gives you an estimated consolidated monthly payment that is equal to or greater than your current minimums, you can’t afford that either.

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