Things To Consider In Debt Consolidation and Credit Scores

Dealing with personal debt is a tough undertaking for many, especially with the rising economic issues and expected inflation rates due to the global pandemic. In fact, it has been found that most households nationwide have an increase in debt-income ratios, specifically up to 170.7 percent as of 2020. 

Fortunately, there are debt solutions available. One emerging trend worth mentioning is debt consolidation, the practice of combining smaller payments into a singular, more manageable expense. However, it seems that only a few know of its drawbacks on credit scores and reporting. To ensure the proper steps are taken, the following information must be considered: 

What Are the Types of Debt Consolidation? 

Debt consolidation, also known as debt refinancing, is an option wherein personal expenses owed are added together at a lower interest rate. This practice can offer much-needed relief in a more timely manner because the rate doesn’t go as quickly as previous arrangements. Typically, most clients would go for either of the following types: 

• Debt consolidation loans

Debt consolidation loans are given by lenders to add all debts under a singular loan. Many banks have this service, but there are also other independent lenders who offer it, such as refinancing providers. In regards to the basic terms, the lender would extend the loan period and approve a loan massive enough to satisfy all outstanding payments to respective creditors.

For instance, when a client has existing credit card debt, every existing payment from each card is put into one debt consolidation loan, leading to a longer repayment period and more reasonable interest rates. It can reduce the debt load, allowing the client to build up their saved income to avoid further expenses. 

• Debt consolidation programs 

Debt consolidation programs combine varied forms of unsecured debt into a single monthly payment, enabling the individual to enjoy reduced interest charges for debt through negotiations with creditors. This consolidation option is accomplished through a non-profit counselling service, such as Credit Canada. It is a great way for clients with complex financial difficulties to simplify and pay off outstanding debt. 

How Does Debt Consolidation Affect Credit Scores? 

Most unsuspecting debt-affected individuals would think that opting for consolidation options is a responsible financial decision since it ensures all expenses are met instead of being forced not to pay. It can even improve the credit rating through payment history. However, one must also take note that short-term debt consolidation can lower one’s credit score temporarily. It may also affect one’s chances for other financing options, such as buying a house or car. All things considered, it would really depend on the immediate context of the one affected by debt and the corresponding drawbacks on the wholistic financial status. 

Conclusion 

Debt consolidation is a widely preferred method among plenty of clients, but it is not a one-size-fits-all option, primarily because of the credit implications. Thus, it is highly advisable to weigh the pros and cons to determine which debt relief solution can pay off all expenses while maintaining a favourable credit rating. To accomplish this effectively, discussions with trained debt consultants are a must to make informed decisions. 

DebtHelpers.ca can offer personal debt relief through custom solutions based on their client’s financial situation, whether it be through consolidation or other means. There is a range of consulting services available to help individuals meet economic stability. Call 1 855-873-6222 to claim a free consultation.