Credit card debt poses a substantial challenge for many people. It is easy to charge new balances to your credit cards periodically, but paying the outstanding account balances off may not be a possibility or a priority. Over time, balances can grow, and high interest rates and the revolving term on credit cards make high balances difficult to eliminate. If you are thinking about consolidating your debts, you may be wondering if this step will also help you to improve your credit rating. Consolidating credit card debt can alter your credit rating in positive as well as negative ways. A closer look at the impact of consolidating debt is necessary before you move forward with this financial strategy.
Exploring the Benefits of Debt Consolidation
Debt consolidation is a legitimate way to improve your financial situation. Generally, a personal loan with a fixed term and a lower interest rate is used for debt consolidation. The combination of having the debt established on an account with these two factors can result in lower monthly debt payments as well as faster debt reduction. As each month passes, you will discover that your regular payments make an even greater impact on debt reduction.
The Impact of Debt Consolidation on Your Savings Account Balance
Savings account balances and debt balances are closely linked. As credit card balances increase, debt balances generally decrease. This is because many people use credit cards to pay for things they cannot afford to pay for with cash, including unexpected expenses. When you have lower monthly debt payments through credit card consolidation, a smart idea is to build up a higher savings account balance with small, regular deposits in your savings account. This can help you to avoid falling deep into debt again in the future, and this can protect your credit rating in a way.
What Consolidation Can Do for Your Credit Score
As you can see, debt consolidation can have a very beneficial impact on your credit score, provided you make your payments on time each month. Another potential concern is your ability to stay on budget and not to make additional charges to your credit cards. After consolidating debts, your credit cards will have a zero balance, and you could potentially make your debt situation much worse if you make new charges to your credit cards. It is best to close these accounts if possible. Consolidating your debts alters the amount of debt you carry on revolving debt versus secured debt, if you use an auto loan or home equity loan to consolidate debt. This can improve your credit rating. Otherwise, simply transferring debt from one account to another may not alter your credit scores much. The real benefit to your credit rating will happen in the months and years to come as you reduce and ultimately eliminate this debt.
Determining If Debt Consolidation Is a Good Option for You
Before you consolidate your debts to a single loan and free up available credit on your credit cards, it is important to be completely honest with yourself about your finances and your ability to manage your money. It is critical that you do not charge up your credit cards again after transferring the balances to your consolidation loan. If you do not believe that you will honestly avoid this possibility, consolidation is not a good option to consider. Consolidation gives you a great way to get back on track and even to improve your credit rating over time, but it is not ideal for everyone. It generally must be done only when the individual makes a solid impact to improve budgeting and financial management at the same time if you want to enjoy the best results.
If your credit rating is already suffering because of your debt situation, you understandably do not want to make the situation worse. You should review the financial impact that consolidating debts will have on your life, such as by lowering your monthly debt payments and helping you to pay off debts more quickly. If you decide to consolidate debts, make every effort possible to pay your bills on time and to avoid taking on more debt. By doing do, you will find that your credit rating likely improves substantially.