Debt Consolidation Can Help Consumers Deal With Heavy Credit Card Debt As Well As Improve Their Credit Scores | Credit Raters post

Debt Consolidation Can Help Consumers Deal With Heavy Credit Card Debt As Well As Improve Their Credit Scores

31 Oct 2019
Approx Reading time: 3 minutes

Debt consolidation can help boost your credit score besides making payment of your bills modest. The process of debt consolidation involves combining your unsecured debt into a single facility paid per month. Debt consolidation can help in lowering monthly payments, lower interest rates, protecting credit and getting out of credit quickly.

Debt consolidation is a path out of credit card debt

The number of consumers involved in the lending market is currently very high. In the first half of this year, there were over 19.6 million individuals with unsecured personal loans. Most of the growth in the conception of the loans is a result of debt consolidation. As a result debt consolidation lures consumers burdened with high credit card debt into consolidating the debt into a personal loan. However, there is a misconception that growing consolidation of debt might lead to consumers sinking into more debt.

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Recently TransUnion (NYSE: TRU) conducted a study on how debt consolidation was impacting consumer credit and debt load. Findings from the study indicated that consumers benefiting from the offers tend to do well on the products in the long-run.

Consolidation streamlines payment of bills

TransUnion’s consumer lending executive Liz Pagel said that there is a change in credit preferences among consumers. Pagel indicated that consumers are streamlining their bills into one payment. The preferable mode is personal loans because they offer a regular payment plan with fixed rates and set conditions.

Usually, consumers burdened with credit card debt have to contend with multiple payments on different cards. However, debt consolidation can enable consumers to pay multiple bills easily as well as helping in boosting one’s credit score.

According to the study on average, individuals who consolidate their debt to a personal loan tend to pay more than 58% of their debt. This thus brings down average credit card balances to $5,855 from around $14,015. Interestingly the study shows that more than 60% of those who consolidated their debt saw a decline in their balances by 60%. This is in comparison to the balances before debt consolidation.

Debt consolidation improves credit score

As a result, the decline in credit line utilization, most of the individuals who consolidated their debt saw their credit score improve. After debt consolidation, some consumers' credit scores improved by almost 20 points.

With credit scores improving consumers easily receive more credit offers from lenders. As a result, this can lead to enhanced credit originations. Following debt consolidation borrowers increased their chances of getting anew credit card or car loan. They even managed to originate home loans at a high rate in 12 months.

Although there is a general increase in indebtedness those who consolidated their debt performed well on credit products. This included even when they were regulating credit risk scores. Consolidation can help consumers deal with past due accounts leading to lower delinquency rates. Equally the debt consolidation loans did well relative to general-purpose personal loans. Despite all this, the concern is whether debt consolidation is making consumers sink in more debt.

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Rebecca White

Rebecca White is chief editor at CreditRaters.com. Rebecca has an extensive amount of knowledge on financial subjects including short-term loans & debt consolidation in the UK and USA. Rebecca has wrote for many publishers such as Debt Secret, My Money, VL and more.