With the many financial problems people face daily, it’s easy to be overwhelmed with debt. When that happens, getting help should be your priority, because debt can quickly become a source of stress in your life. One of the ways to manage debt is through debt consolidation. It comes in handy when you owe several creditors. It can help you simplify the repayment process or even save you money.
How Does Debt Consolidation Work?
Debt consolidation is a type of debt management plan that involves getting a new loan to pay for the previous ones. In other words, you’re combining or consolidating your debts into one monthly payment. As Symple Lending explains, this method has several benefits, like getting out of debt quickly and simplifying your loan payments.
However, debt consolidation also affects your credit score in some ways. For instance, it can lead to hard inquiries on your credit. Each time a lender inquires about your credit, your score is reduced by several points. That means your credit can take a hit when shopping for debt consolidation loans.
The good news is that it’s temporary, and multiple inquiries done within a specific period of between 14 to 45 days are considered one. That said, here is how to consolidate debt without hurting your credit.
Take Out a Personal Loan to Cover Debt
Taking out a personal loan is a practical way to settle your credit. You can use the money to pay all your debts instead of making different payments every month. However, this method only works if you have a good credit score. In such cases, you might find a loan with lower interest rates than what you already owe your creditors.
Limit Hard Inquiries
As mentioned, hard inquiries will affect your credit score. That’s why it’s important to limit applications for a new loan. When shopping for one, check their suggested credit score and see if you fall within that range. Apply with lenders with great approval odds. This will prevent unnecessary inquiries, preserving your credit score.
Apply for a Debt Consolidation Loan
Another common way to consolidate debt is through debt consolidation loans. You apply for a loan that pays your other debts. Once that’s done, your credit report will reflect those debts as paid in full. Consulting with an expert, such as a knowledgeable associate at Symple Lending can help you make an informed decision when taking out this type of loan.
Pay Off Your Debt Consolidation Loan on Time
After taking a consolidation loan, it’s important to pay it back on time. Your payment history contributes to your FICO score by about 35%. As you know, lenders use this score to evaluate the level of risk you pose. Paying your debt consolidation loan on time builds a positive payment history, helping your credit score go up.
When dealing with multiple debts, the last thing you want is for your credit score to keep going down. The methods highlighted above can help you consolidate your debt without affecting your credit score too much.