What is Debt Consolidation?
Each time an individual is extended credit, either from a financial institution or a business, the lender sets an annual percentage rate of interest (APR) that must be paid back along with the principal. When individuals open many lines of credit and begin to accumulate debt, each account will charge the customer their specific interest rate on top of the balance each month. In order to stay in good credit standing, the minimum payments must be made monthly to every account, but when each creditor is charging between 10-20% interest, it becomes difficult for individuals overcome the constant wave of interest that continually accrues.
Debt consolidation occurs when a debt management company takes control of all the accounts an individual owes on and presents the customer with only one bill, allowing interest to be charged to a single account, instead of multiple accounts with multiple APR rates. Debt consolidation experts communicate with the lenders and make deals to settle the remaining balance of the accounts, and then offer the customer a manageable monthly payment with a lower interest rate. When debt consolidators cancel the credit of their customers, they do so at a lower interest rate than the person was initially paying, which allows debt consolidators to pass the saving onto their customers. In many cases, the total amount of debt is reduced and customers save thousands of dollars in interest over time after choosing to consolidate their debt.
Who Could Benefit from Debt Consolidation?
- Recent College Graduates – College is expensive and many graduates had to turn to private and government loans to pay tuition. Graduation doesn’t always mean big paychecks, so recent college grads can lower their student loan payments and interest by consolidating their debt.
- People who make Minimum Monthly Payments – The more payments customers make, the more interest they end up paying out. Making the minimum monthly payment on multiple accounts only puts people further into debt. Debt consolidation customers only have to make a single payment every month, instead of four, five, or six.
- Divorcees and Single Parents – Single incomes and multiple payments just don’t mix. Debt consolidation takes the money that would have been wasted on absorbent interest charges and puts it back into your wallet.
- Anyone Struggling with Debt – Debt consolidation companies have the leverage and knowhow to reduce the amount you pay each month and keep interest rates affordable, allowing their customers to regain financial control of their lives.
How does Debt Consolidation affect Credit Scores?
Credit scores are directly related to the amount of available credit an individual has. For instance, a person’s credit score is negatively affected when their accounts are maxed out, leaving no available credit. On the other hand, when accounts are paid out and closed, this too can negatively affect one’s credit score. If a debt consolidation company pays off and closes their customer’s accounts, then this could have a negative impact on their score. If the company pays off their customer’s debt, but keeps the lines of credit open, then the affect on their credit score is reduced.
Credit scores are directly related to the amount of available credit an individual has. For instance, a person’s credit score is negatively affected when their accounts are maxed out, leaving no available credit. On the other hand, when accounts are paid out and closed, this too can negatively affect one’s credit score. If a debt consolidation company pays off and closes their customer’s accounts, then this could have a negative impact on their score. If the company pays off their customer’s debt, but keeps the lines of credit open, then the affect on their credit score is reduced.
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