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How Debt Consolidation Can Build Your Credit
By Michael J Brazier
Dated: Sep 02, 2010
Nonprofit credit counseling services can help improve credit and get you out of debt in 5 years or less.
The debt management industry and the services within can be easily confused. While some consumers think
debt management programs hurt credit there are some plans that can actually improve credit while enrolled.
Primarily, it depends on the status of your accounts upon entering a program and selecting the program that
best suits your current financial situation and long term credit goals. A debt consolidation plan makes
payments each month as received from the client, helping improve the score over time. A debt settlement
plan, often confused for consolidation, places accounts in a charged off status to enable balance
negotiations. The only problem with a settlement plan is that the accounts have to first charge off before
negotiating a lower balance pay off. Once an account charges off though, it remains as a negative on your
credit for 7 years- paid in full or not. That’s only 3 years less bad credit than filing bankrupt.
Debt consolidation- not debt settlement- can help improve your credit score over time while paying back
the debt. Accounts may be reported to the credit bureau as ‘being paid by a third party’. This notation does
not affect your actual numeric credit score negatively or positively. It doesn’t hurt your credit rating in any
way, shape, or form. At the end of the day, creditors and the credit bureau do not care who or how your
payments are made, long as they’re made on time and consecutively each and every billing cycle. A debt
consolidation plan makes the payments to creditors every month as payments are received from their
clients. The due dates are renegotiated along with the other terms to ensure payments are considered timely
and report positively, improving the score.
Making payments on time is the biggest factor in what affects your credit rating on a regular basis. 35% of
your score is made up of timely monthly payments each billing cycle. In a consolidation plan, the due date
is changed to coincide with a time that better fits your other monthly obligations and pay schedule and
ensures timely payments right from the start of enrollment.
Did you know? Spending more than 30% of your available balance lowers your credit score? That means if
you have a credit line of $5k, keeping a balance of more than $1500 is negatively impacting your credit.
30% of your credit score accounts for how much total outstanding debt you owe. These accounts may be
being paid on time every month but if the balance is above 30% of the credit line the payments aren’t
helping as much as they could.
Standard minimum monthly payments are designed to pay off 1% of the balance with every minimum
monthly payment. That means if you stop spending on your account it could take around 100 minimum
monthly payments to pay back your total debt at the standard rates, or 8.3 years. In a debt consolidation
plan the interest rates are reduced to lower fixed rates, usually in the single digits. This allows the consumer
to have the majority of the payment apply to the balance instead of the interest, bringing the balances down
much faster- lowering your overall debt amount at an accelerated rate.
Standard rates and terms issued by big banks direct to consumers are set at a rate that would take over 8
years to payback with minimum monthly payments. In a debt consolidation plan, the minimum monthly
payment requirement coincides with the interest reductions in an effort to get the consumer out of debt in 5
years or less, applying the majority of your minimum monthly payment to the principle balance not the
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You can still obtain new lines of credit while consolidating you debt. It’s not ideal….as the point is to get
OUT of debt not incur more- but you can nonetheless. Not every account has to be consolidated either.
Dent consolidation is not an all or nothing deal. Pick and choose which creditors are charging you too much
in interest and only consolidate those accounts. You can always add or remove accounts from a
consolidation plan at a later time without being charged anything additional.
One lower monthly payment. Lower fixed interest rates. No late fees. No creditor calls. Improving credit
on a monthly basis. Debt free in 5 years or less. For more free information or a free financial consultation
contact a certified credit counselor at a nonprofit debt consolidation organization accredited by the Better
Business Bureau. Call 800-905-1563 or visit our website freedomdm.org and complete our contact request
form or LIVE CHAT with a counselor during business hours. Freedom Debt Management is a BBB
accredited A+ nonprofit organization helping people become debt free one household at a time. You can be
debt free, Freedom Debt Management can help.
Certified credit counselors work with potential clients to assess their current financial situation and
determine what their best option may be.
Category Consumer, Finance, Society
Tags Finance, debt
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