Eliminate Bad Debt: Consolidation Loans that Improve Your Credit Rating

Bad debt consolidation loans can help save your credit in the long run. When you consolidate, you may find a brief drop in credit initially. However, by reducing your total debt and eliminating particularly toxic debt, you will find your credit score recovers and climbs within a short period of time. There are a number of options to consolidate in order to ultimately save your financial profile.

Student Debt Consolidation

Student debt consolidation is often the easiest to pursue and comes with the least amount of penalties. Many recent graduates have more than one loan. In fact, most students will take a combination of loans to meet the total cost of tuition and living expenses. These debts can have extended repayment if graduates do not make an effort to reduce the principal quickly. Consolidating student loans into one lump sum can present an option to refinance to a shorter payment cycle. This will reduce the principal debt much faster. If the loans are through federal programs, there is no penalty at all to consolidate or prepay the loans. In fact, the government offers easy student debt consolidation programs.

Home Equity Consolidation

Having multiple liens against your home can be a challenge on many levels. First, there is the possibility you have mortgaged too much of your equity. Second, it is harder to keep track of multiple debts than a single mortgage, contributing to the possibility of missed payments. When you consolidate home equity loans and mortgage loans, you may have the chance to settle a portion of the debt. In doing so, you will lower the amount of home equity you have down as collateral. This restores a portion of your total equity, leading to a greater asset base. Having a larger asset base will enhance your credit rating in the long run because credit scores take into account your debt to asset ratio. Consolidating home equity loans, like consolidating student loans, also presents you with an option to shorten your payment cycle to pay down the debt faster.

Credit Card Consolidation

Having a number of open credit cards is okay, but having too many can be a bad sign to potential future creditors. They may be concerned you could go heavily into debt in just one day if you spend the limits on all of your cards. This could significantly change your debts, and you may not have enough liquidity to cover the debt payments. To hedge against this, lenders like to see a fair amount of possible debt. If you have multiple open credit lines, each with a small balance, you can consolidate these into one or two credit lines with a larger balance. The total amount of credit you have available will go down slightly. Your credit rating will drop at first. However, within a few months of paying down the debt you owe to the new credit balance, you will see your score start to climb again. Lenders will be less afraid to extend you installment debt for a car or a home.

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