Most people don’t consider debt
consolidation loans until one of two things happen.
Either they’re being told that interest rates
are so low that it’s the absolute best time to
consolidate or they’re having trouble making payments
on their monthly bills. No matter what reason has prompted
you to consider debt consolidation, you’re now
taking a very important step – becoming informed
before you run headlong into a debt consolidation loan.
One important thing to remember when you’re trying
to decide whether to take out a debt consolidation loan
or simply continue making monthly payments is the impact
the decision will have on your credit report. Many people
are under the misconception that their credit will be
better if they don’t owe anything. While creditors
do look at the amount of outstanding debt, the credit
report entries have a bigger impact on your credit score.
Here’s why.
Each time you enter into a credit agreement –
with a bank, credit card company or any other type of
lender – you’re making a pledge that you’ll
make regular payments to the account. Usually those
are monthly, though they may be more or less often.
Each time you miss a payment or are late, the creditor
notes that and it’s included on your credit report.
But positive notations also affect your score. Each
time you comply with the terms of the agreement, the
creditor sends a positive notation for your credit account.
Most potential creditors look closely at both your ability
and your willingness to make payments on time. Paying
off a credit account early won’t be a negative
point to your credit score. By the same token, making
all the payments on time will usually make a positive
impact on future creditors – more so than having
nothing on your credit report. While paying off your
credit accounts won’t negatively impact your credit
report, it also eliminates all those positive notations
you could have received for making payments on time.
So does that mean that you shouldn’t take out
a debt consolidation loan and pay off those debts? There
are many times when this is the prudent move. For example,
if you’re having trouble making payments on time
or find that you can never afford to make more than
the minimum payment on a high-interest credit card.
In this case, you’re probably not even treading
water, but are on the verge of sinking. Each time those
payments are late, you’re adding a negative note
to your credit report. If you’re barely making
payments on time, you’re probably only one missed
day of work away from missing a payment due date.
One other important note to consider is interest rates.
You can often save a lot of money by taking out a debt
consolidation loan with interest rates that are likely
to be a fraction of your credit cards. In this case,
you may choose to continue making payments on one or
two accounts, but pay the rest off.
If it’s time for you to take some action, it’s
easy. Taking out a debt consolidation loan may very
well be the next important step toward taking control
of your credit. |
