When you owe a large amount of money to various creditors, you may consider consolidating the debts into a single loan. Depending on the circumstances, debt consolidation could lower your monthly payments and simplify the payment process. However, before you agree to debt consolidation, it helps to understand the process and regulations.
Does Consolidating Credit Card Debt Hurt Your Credit Rating?
By itself, consolidating credit card debt won't harm your credit score. However, your credit card utilization rate, which is the total debt you owe divided by your available credit, determines 30 percent of your credit score. If you close credit accounts after consolidating debt, your overall available credit will decrease, which increases your utilization rate and harms your credit score. Furthermore, if you apply for a new card or debt consolidation loan to complete the process, a hard inquiry will appear on your credit report, which can also decrease your credit score. If you are seeking a consolidation because you are having trouble making payments and have paid some bills late, your credit rating has already been hurt by the late payments.
What Is the Best Way to Consolidate Debt Without It Affecting You?
When you consolidate debt, avoid closing credit card accounts, as this can lower your credit score. If you are afraid of racking up more debt, cut your credit cards up or put them in a safe place where you won't be tempted to use them. Research any credit counseling or debt relief companies thoroughly before using their services. Some companies operate scams that can worsen your financial situation, according to the Federal Trade Commission.
Does the Lender of a Debt Consolidation Loan Deposit the Money Into Your Checking Account?
Lenders of debt consolidation loans usually deposit the proceeds of the loan into your checking account electronically. However, many debt consolidation loans stipulate that you must use the money to pay certain debts included in the consolidation within a specified time. Furthermore, some lenders may opt to disburse portions of the funds directly to the creditors you agreed to pay.
Can a Secured Debt Consolidation Loan Be Utilized for Anything?
When you obtain a secured or unsecured debt consolidation loan, the lender might specify the loan's purpose in the contract. If paying certain debts is a condition of the loan, then you must use its proceeds to do so. However, if you have funds left over, or if the lender didn't include such specifications in the loan documents, you can use the consolidation loan for any purpose you like. Using the loan for a purpose other than paying down debts isn't usually wise.
Can a Debt Consolidation Contain Utilities?
You can use debt consolidation loans to pay any bills, including utilities. Because unpaid utility bills aren't a revolving debt that increases your debt-to-income ratio in the eyes of a lender, few lenders will require you to pay utility bills with the proceeds of your loan. However, if you owe utility bills and you can qualify for a large enough debt consolidation loan, it's wise to pay them off.
Amanda McMullen is a freelancer who has been writing professionally since 2010. She holds a bachelor's degree in mathematics and statistics and a second bachelor's degree in integrated mathematics education.