Individuals dealing with a lot of outstanding debts can benefit a lot from debt consolidation. This method allows anyone with multiple debts to manage their liabilities better and get the chance to get more reasonable interest and terms. It is a recommended move to some, but whether it could benefit you or not depends on many factors.
Before you consider debt consolidation, you need to study how it can affect your overall credit score. This step is essential, especially if you plan to purchase a house. In case you do not know yet, consolidating your debts can lower or raise your credit score. This article will tell you all you need to know about debt consolidation.
What Is Debt Consolidation?
Debt consolidation is the process of combining all of your debts into one. You can get a better interest rate on this debt if you are lucky enough. But there is still a chance of getting a loan with a high-interest rate. In some situations, you will pay interest rates that are higher than the original ones. Before you grab this opportunity, you need to find a debt consolidation loan with good terms and conditions.
If you want to lower your debt, you need to consider charged-off debt consolidation. This type will lower your unpaid debts down to one debt. As long as the debt consolidation is done the right way, you could have an interest rate lower than your original one.
How Debt Consolidation Can Increase Your Credit Score
One factor that weighs into your credit score is your debt-to-income (DTI) ratio. This ratio is based on the amount of your debt compared with your income. If you are using a debt consolidation loan, you can lower your DTI ratio.
It can increase your credit score in the long run. Once you combine all of your debts into one, the DTI ratio may be lower, and your credit score can improve.
Another one of the main reasons debt consolidation can get rid of your debts is that it can make payments easier for you. With this process, you won’t need to pay your debt at different times because everything will be under the same loan. This makes paying on time much simpler, and this can help raise your credit score.
How Debt Consolidation Can Lower Your Credit Score
There are also instances when your debt consolidation can lower your credit score. It will do so by decreasing your available credit limit. As you combine all of your debts into one, your available credit limit will also be lowered.
A lower credit limit means you are using more than you can afford. If you use more than you can afford, you are more likely to be considered a risky borrower.
You need to watch out for the amount of credit you are using. If you have a lower credit limit, you need to make sure that you don’t use up all of it. Also, if you can avoid using up all of it and have a higher credit score, you can get better loan options.
Many people are afraid that debt consolidation can lower their credit score. But you need to know that the process can be done in a way that will not affect your credit at all or even improve it. Working with people who can get you the best debt consolidation loans for your home purchase is one way to make the most of this opportunity.
Ottawa Mortgage Services is an Ottawa-based mortgage agent that can help clients of all kinds find mortgage services that would best suit their needs. We also offer a debt consolidation service that can help you save your money, increase your cash flow, and fix your credit rating. Contact us to learn how we can help.