Facing high interest rates from a variety of creditors is a position no one wants to find themselves in. Due to the unfavorable terms, the monthly payments you make never seem to make a dent in the outstanding balance that you owe. Over the last ten years, debt consolidation has become a popular choice for those who want to take control over their high interest debt. While there are many ways to consolidate debt, many people wonder how it will ultimately affect their credit score. Here are some ways in which you can consolidate your debt, and what effect it may have on your credit score.

Ways To Consolidate Debt

1. Debt Consolidation Services

– Perhaps the most common form of debt consolidation is taking advantage of a debt consolidation service. These companies essentially take out a new lower interest loan that is used to pay off your existing high interest obligations. You then make payments on the new loan which has a lower interest rate. In an ideal situation, this new lower interest loan will cost you less in the long run than any of the higher interest obligations that you have been paying. This approaches assumes that you can qualify for a low interest loan.

2. Low Interest Credit Cards

– You may have seen advertisements for zero interest credit cards. Typically, these cards offer no interest for an introductory period such as one year. Using these cards to pay off other high interest debts and then making payments on the zero interest card can be an effective form of debt consolidation. It is important to remember that once the introductory period expires, the interest rate on these cards can balloon up to more than 20 percent. Some of these cards also carry an annual fee.

3. Home Equity Loans

– If you own a home, you may be able to consolidate your debt through a home equity loan. These loans are often offered at lower interest rates because they are backed by your home as collateral. It is important to remember that if you default on your home equity loan, then your lender has the right to foreclose on your property, leaving you in a much worse position.

How Debt Consolidation Affects Your Credit Score

Taking out new loans always has the potential of negatively affecting your credit score. For this reason, the initial process of consolidating your debt may result in a reduction of your credit score. However, if you timely make your monthly payments on your new loan, then you are reducing your overall debt which can allow your credit score to begin to rise. In the long run, debt consolidation is the smart play if you cannot afford to pay off all of your high interest obligations at once. You may take a credit hit in the beginning, but by making timely payments on your consolidated debt, you will start to see an increase in your overall credit score.

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