3 Ways How Debt Consolidation Can Hurt Your Credit Score

3 Ways Debt Consolidation Can Hurt Your Credit

Posted by: Steve |
9, November 2017

When you are in debt to multiple parties and paying at a different interest rate to each party, meeting separate deadlines, it can result in a bit of havoc. Instead of paying all those creditors, you can opt for debt consolidation.

What Is Debt Consolidation?

It means to merge debts. You get a loan from one party, the bank or any debt consolidation companies, and pay off all your creditors. After paying off multiple parties, you are only in debt to one party – the creditor of the consolidation loan. Debt consolidation loans have lower interest rates, plus you can find one with the smallest monthly installment plan. It makes the whole debt situation less stressful, and the planning makes it easier.

debt consolidation loan

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Due to the lower interest rate, debt consolidation in Australia can be quite a lifesaver. Debtors can save a significant amount of money on the reduction of interest rates. Since the debt becomes easier to manage, it makes debt consolidation loans look quite appealing. But it too can hurt your credit in a few ways. Some side effects of debt consolidation are:

Your credit report will list a new loan. This loan can cause a drop, temporarily, in your credit score. Although you will have paid off other accounts, it takes quite some time for your credit score to build up.
Once your debt is paid, let’s say on your credit card, it is now available for a lot more swiping. People can just walk out of one debt and into another, and will still avail the opportunity of being provided more debt on the swipe a card. This can be dangerous for your overall financial health because it will put you back in the same position; back to square one. It is a big risk because now you have two accounts to pay, a large debt consolidation account as well as a piling credit card debt.
If you fail to meet monthly installments, then it will reflect on your credit score right away. This is an ideal example of the bad credit debt consolidation loan. In fact, failure to meet repayments can actually be far worse than a mere bankruptcy. This makes debt consolidation loans a dangerous game to play.

If you live in Australia and have a bit of a financial situation, then you can contact a professional counselor who can provide Australian debt solutions. They can be very helpful in matters of maintaining and managing budgets and the hassle of debts. You should also discuss with them, at length, whether it is a good idea for you to get a debt consolidation loan.

Not everyone qualifies for a debt consolidation loan. There are certain criteria to meet, but when you do, you need to be certain and quite careful with repayments. A debt consolidation cannot be used to dodge repayments. Before you get one, you need to do your research to find out which company has the best terms.