How to Consolidate Debt without Ruining Your Credit Score

For individuals with multiple loans, debt consolidation may seem like an excellent choice, as rolling all your loans into one consolidated loan makes managing repayments easier. 

Although, this financial strategy is much more complicated than being approved for the process. For example, one risk of debt consolidation is that it may end up costing you more overall, if the interest rates or fees are higher than before. 

In addition, some individuals continue their spending habits and end up getting deeper into debt and, as a result ruining their credit score even more.

Fortunately, there are multiple debt consolidation strategies, some of which are more responsible than others. But before you commit, it is best to speak to a mortgage broker as they can guide you through the major debt consolidation strategies to find the best plan for your circumstances. As each debt consolidation option has its own features, advantages, and disadvantages. 

Four Debt Consolidation Strategies

The first debt consolidation strategy is debt settlement. In this type of consolidation, you would make a single large payment toward an existing debt in return for the forgiveness of the remaining debt to a settlement company. For example, someone who owes $10,000 on a single credit card may approach the credit card company and offer to pay $5,000 in cash upfront. The credit card company would then waive or delete the outstanding $5,000 owed in exchange for this one-time payment.

Another debt consolidation strategy is a debt consolidation loan. Where essentially, you go to a lender and take out a single loan that pays off all of your current debts, leaving you with one combined loan. Those loans are then considered "Paid in Full" with a zero balance on your credit report. Collateral is typically needed in this type of consolidation, although it is not always required.

The third debt consolidation strategy is to use a debt management plan. For this type of consolidation, a credit advisor would be appointed to you to work with your lender and help make your monthly obligations more affordable and manageable for you. Your credit accounts will be frozen for a period of time, preventing you from opening any new accounts or making any further transactions.

Finally, you have the option of using balance transfer cards. For this type of debt consolidation, you transfer all of your credit card debt onto a single new card. This introductory offer given by lenders also sets little to no interest rates for a specified introductory period. Allowing you to aggressively pay off your loans without fear of incurring high-interest rate charges.

What are the Effects of Debt Consolidation Strategies on Credit Scores?

In the first form of debt consolidation – debt settlement – your accounts will be marked as "settled" on your credit report, which may damage your credit history and scores. 

A consolidation loan can initially harm your credit score, but it will actually increase your score if you make on-time payments for the whole duration of the loan.

A debt management plan has little negative impact on your credit score and will also serve to increase your score if you make repayments on time for the whole duration of the loan.  

The balance transfer card strategy will trigger a minor dip in your credit scores, but it will increase your credit utilisation rate and, as a result, your credit score.

A debt management plan or a balance transfer card is the safest ways to consolidate your debt because they have the least unfavourable impact on your credit scores which may lead to positive effects on your finances. However, remember you can only consolidate your debts if you can afford to cover them, since if you fail to pay your consolidated loans on time, your finances will become worse than they were before.

In addition, some other considerations that are essential to note before committing to a debt consolidation include the following.

Make Sure You Will Pay Less on Your New Consolidated Debt 

Before committing to a debt consolidation strategy, make sure you compare the new loan's interest rate, as well as the fees and other expenses, against your existing loans to ensure you are getting a better deal. 

You also need to check if you can handle the new repayments, because remember when switching to a longer-term debt, although the interest rate is smaller, you may end up paying more in interest and fees overall.

Debt consolidation might not be worth the hassle if the new loan is more costly than the existing loans combined. Remember to factor in other prices, such as:

• Penalties for paying off your original loans early,

• Legal fees,

• Valuation fees,

• Stamp duty,

• If the new loan is insured, some lenders charge these fees if the new loan is secured in relation to your house or other possessions.

Use Your Home or Other Assets as Loan Security 

You might be able to get a lower interest if you try consolidating your unsecured loans – such as credit cards and personal loans – into a single secured debt. In this process, you would put up an asset – such as your house or car – as collateral for a secured loan. 

Having a secured loan ensures that if you are unable to repay the new debt repayments, the house or vehicle you put up as collateral can be taken by the bank so they can sell the asset and repay the money you borrowed from them. 

Although, to be safe, before using your home or other properties as security, consider all of your other choices and speak to an experienced mortgage broker.

Hire a Professional Mortgage Broker

Any company that advertises they can get you out of debt regardless of how much you owe is unrealistic. You should not trust a company that:

• Is not licensed, check if the company is on ASIC Connect's Professional Registers; if they're not listed, they're operating illegally,

• Asks you to sign blank paperwork,

• Refuses to negotiate repayments,

• Rushes the deal,

• Will not place all credit expenses and interest rates in writing until you sign.