As an individual starts amassing a significant amount of credit card and unsecured personal debts, they run an escalating risk of getting themselves into financial difficulties. Crossing over into financial trouble can best be described as reaching a point in time when the you start missing payments, spends too much time paying bills and/or start to feel the stress of impending financial disaster.
Facts About Credit Card Debt
Every quarter, the US Federal Reserve accumulates and reports information related to consumer and/or credit card debt. On it’s report dated September 30, 2016, Americans had accumulated credit card debt to the tune of $729 billion. That calculates out to $15,675 of credit card debt per household. On average, people are using 13.9% of their disposable income trying to service said debt. It’s should be easy to see how quickly credit card debt can become a significant problem for the average American.
Debt Consolidation as a Solution for Escalating Consumer Debt
Given the rather severe consequences related to debt settlement and bankruptcy, those potential solutions for escalating debt issues should be considered last resort options. While an individual still has a relatively decent credit score and rating, debt management and finding the best debt consolidation program they can remain as the best alternatives. Since debt management focuses on teaching the individual how to better manage their debt as is, debt consolidation becomes the best option that involves some form of debt relief.
A debt consolidation loan serves to consolidate a large number of credit card obligations into a single obligation. The potential benefits a person derives from securing a debt consolidation loan includes the elimination of administrative work to get bills paid, a lower effective interest rate and a potentially lower monthly cash outlay. It’s also possible that the individual will be able to pay off their debt sooner. When it comes to how one’s credit rating and score might be affected, the waters get a little murky.
How Debt Consolidation Affects Your Credit
If you are considering a debt consolidation loan as a viable alternative to your mounting debt issues, you need to be aware of how that might impact your credit rating. Initially, you might see a minor dip in your score simply because an installment loan company has made an inquiry from the credit agencies. If you seek a loan from several lenders, the impact could be a little more significant.
Once you secure a loan, things can get a little tricky. If your new lender requires you to shut down you credit cards all of a sudden, there will be a negative impact on your credit. You might show much lower debt-to-credit ratios, which do tend to drop your credit score in the near-term. There’s also the possibility you will become delinquent on some of your payments while the debt consolidation loan is being approved, which obviously will have a negative impact on your credit rating.
Another thing you will need to consider is that you are giving up temporary control of your debt situation while still maintaining 100% responsibility for what happens with it. During the process of getting your debt accumulated, there’s always the risk that the debt consolidation lender will miss a payment or send payments in late. While you had very little to no control over the process, it still impacts your score.
All of these considerations are addressed in the short-term. If you are able to better handle your debt load on a go forward basis, there’s a real possibility you can actually start increasing your credit score by making timely payments and decreasing the overall debt amount. The problem you need to avoid is using your new found debt freedom as the basis for getting new credit cards and starting the potential nightmares all over again.
Before you move forward towards any type of debt solution, you would be well served to figure out how you allowed yourself to get into such a precarious position in the first place. A little debt counseling could go a long way towards teaching you how to budget your monies and keep from becoming over-reliant on consumer debt to help you maintain a particular lifestyle.