When you apply for any financial credit, whether credit or loan, you need to make sure that you have enough money to repay it and that you will be able to pay all the installments (bills) regularly.
Things to know before applying for a loan or credit card.
When applying for a loan or credit card, complete your information on topics such as:
What will be the interest rate?
When will the installments be due and when will the loan be repaid?
What will be your monthly installments?
Is there no charge for the loan fee or the annual cost of the credit card?
Will you be required to pay a penalty if the loan is settled earlier than agreed?
What will happen if you are unable to repay?
If you have a decision to take out a loan, it is advisable to thoroughly consider the offers of other financial institutions to find the best possible terms. Note, however, that only reputable financial institutions such as banks and credit unions are suitable for this purpose.
After receiving a loan or credit card, you must pay the installments specified in your contract with the financial institution monthly and in full. If your installments are not paid or are not paid on time or not paid in full, it can jeopardize your credit history.
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The interest rate announced by credit card companies is often high, ranging from 18% to 21%. The company issuing your credit card will set a small amount as the minimum payable on the invoices submitted. If you only pay this set minimum each month, you will end up having to pay much more for the interest added over time.
It is recommended that you pay your credit card bill in full each month. If you are unable to do this, it may be because you are spending more than you can afford and it is best to stop using your credit card until it is fully settled.
For one reason or another, you may find yourself in a situation where you may not be able to manage your finances and pay your bills and your debt is increasing. This may be due to unforeseen expenses or sudden loss of income or incorrect prediction of financial ability to repay loans taken and credit card expenses.
Having financial pressures and having trouble managing your debts can be stressful for you and your family, and can affect your credit history. If you are having trouble paying off your debts, in this article we will introduce one of the debt relief methods which are the debt consolidation method.
If you have multiple high-interest accounts, monthly payments will be difficult and stressful for you. In such cases, if you use the debt consolidation method to pay your debts, your monthly payments will decrease and your credit score will increase. In this article, we look at how debt consolidation affects your credit score.
Why Use Debt Consolidation?
Debt consolidation can save you money. Debt consolidation with a new low-interest rate loan will help you organize your expenses. In this case, the savings will be done better and your worries about repayment will be easier.
This way you have an account that is easy to manage. When the number of accounts increases, the possibility of mistakes increases and you may forget some payments. Delays in payment time damage the credit score. So a debt consolidation method can help maintain and improve your credit score.
How Can Debt Consolidation Affect Your Credit?
To have good financial security and plan for retirement, you need to pay off your debts as soon as possible. Two conditions are necessary to get rid of debt:
- Reduction in costs
- Increase revenue
Debt consolidation is a cost-effective way to help you pay off your debts as quickly as possible. But how debt consolidation affects your credit score needs to be considered. Here are some things to look for when selecting yours:
- Credit Inquiry:
Each time you apply for debt consolidation, the lender will review your credit report, which will lower your credit score. Also, if you apply for several loans, you will lose more points.
- The average age of accounts:
Each time you open a new account, the average age of all your accounts decreases. If you have many accounts, opening a new account will not affect your credit score much.
The older you get your credit score and the better your payout history, the higher your credit score.
- Credit usage rate:
When using debt consolidation, your credit usage may be affected. Using credits and cards will affect your scores.
This can increase your credit score if you have a high-interest rate credit card or use a consolidated loan for your debts.
- Payment history:
If debt consolidation improves your ability to pay, it will affect and increase your credit score over time.
In addition to the above, there are other reasons why your credit score may fall short when debt consolidation:
- New credit programs:
Your credit score may be damaged even before debt consolidation. When applying for a loan, the lender does some research on your credit, which lowers your credit score.
- New credit account:
When you open a new credit account, your credit score is temporarily reduced. The lender considers the new credit risk and therefore your credit score will drop temporarily.
Despite the above, it can not be said that debt consolidation always reduces the credit score. Here are some positive points:
- Use ratio less than credit:
When you open a new account for debt consolidation, the amount of credit you use may decrease as your credit increases. When you use less of your credit, this factor counteracts the negative factors that affect your account.
- Good debt record:
If you make your payments on time, your credit score will gradually increase. This is the most important factor in improving your credit score so always try to pay on time.
Debt consolidation can reduce your monthly payments and help increase your credit, but some risks can cause your credit score to drop temporarily. However, if you change your bad habits in paying off debts, it will have a positive effect on your credit score.
There are ways that debt consolidation can improve your credit score if:
- You pay your debts on time every month.
- Eliminate or reduce your account balances.
- Create different accounts. Having multiple accounts can help increase your score.
- By doing this, you will gradually change your bad habits and your debts will no longer accumulate.
Debt consolidation can hurt your credit score if:
- Delay the payment of your loans.
- Recharge your credit cards again after paying off your debts.
- You apply for loans for which you are not eligible. In this case, your credit score will be reduced for a short time.
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NB: The purpose of this website is to provide a general understanding of personal finance, basic financial concepts, and information. It’s not intended to advise on tax, insurance, investment, or any product and service. Since each of us has our own unique situation, you should have all the appropriate information to understand and make the right decision to fit with your needs and your financial goals. I hope that you will succeed in building your financial future.