October 20, 2020
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Finance

What Not to Do When Consolidating Debt

Month after month, the bills stack up. Sometimes, the money in a person’s checking account runs out before all the bills are paid. If this is a situation that continues to happen, it may be time to take action and consider debt consolidation. It is possible to find options from Debthunch; however, there is more information about this here, as well.

Knowing what not to do when trying to consolidate debt can help minimize issues and ensure the desired results are achieved. Keep reading to learn what these mistakes are.

Never Apply for Several Accounts at One Time

Remember that consolidating debt can cause a short-term dip in a person’s credit score. Each time a person applies for credit, their lender will perform a hard inquiry on their credit report. Every hard inquiry will result in a drop of a few points of the total credit rating. This is why it is not a good idea to apply for several accounts in a limited amount of time.

The good part of this is that it is typically just a short-term dip. Remember, the goal of a debt consolidation loan is to make paying it off easier. A person must also change their spending habits off to help ensure payments are being made on time.

Avoid Closing Old Accounts

The length of a person’s credit history makes up about 15% of their total credit score. This means the longer that a person has held an account, and if they keep it in good standing, it reflects better on the score. Since a new loan does not have history, any newly opened consolidation account will reduce the total age of all credit accounts.

To keep the average age from falling, even more, do not eliminate any other long-standing accounts. Even the old credit card that is never used is still working in a person’s favor. If the account is closed, it will reduce the pool of available credit, which may negatively affect their entire credit score.

Don’t Put a Person’s Home at Risk

Remember, there is unsecured debt, like credit cards, and secured debt, like an auto loan and mortgage. The difference is that any collateral will not back the unsecured debts. Sometimes, a person is tempted to use the home equity they have to consolidate their debt. This may work, but only if the person can continue making regular payments. Since the equity of the home is backing the loan, a person may face foreclosure if something keeps a person from being able to afford the payments down the road.

Mistakes to Avoid when Considering a Debt Consolidation Loan

When someone is ready to consolidate their existing debts, there are many factors they must consider. Be sure to keep this information in mind to ensure it provides the desired results. Debt consolidation can be helpful, but it may not be right for all situations. Sometimes, speaking with the professionals for advice about what to do and if consolidation is a good option is smart.