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How to Consolidate Credit Card Debt Without Hurting your Credit

Analysing everything needed to eliminate card debt

by Nvindi
3 November, 2022
in Credit Card
How to consolidate credit card debt without hurting your credit

Consolidating credit card debt can be a good financial move for your personal economic stability. Beginning the process of paying off card debt will improve your credit standing.

Debt consolidation can also end up hurting your credit score. Let’s take a closer look at all of these aspects.

Contents

  • What is credit card debt consolidation?
  • Why does debt consolidation affect your credit?
  • Potential credit damage
  • When is it recommended, and when is it not recommended to consolidate credit card debt?

What is credit card debt consolidation?

When we talk about credit card debt consolidation, we really want to express the solution to a problem: an indebtedness regarding the card that can become difficult to face.

Therefore, the first thing to keep in mind is that with consolidation, what we intend to do is to pay off a debt. That means that there are many ways to consolidate a credit card.

The most common ways are the following:

  • Through refinancing: in this case, what we do is obtain added financing to pay off the card debt and reduce interest and costs comparatively. In other words, the loan you have applied for will impact your pocket less when it comes to monthly payments.
  • Through debt freezing: this method is less frequently used. What is done in this case is to freeze the debt for a time period agreed with the card issuer. The most common model is to stop only the application of interest, while still paying off the principal. Although, in some cases, it is possible to request an extension of the installments for a specific number of monthly payments.
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There are also mixed formulas. In this case, you would have access to additional financing, but during that time, this financing would not charge you interest. For example, requesting a 24-month loan in which you only pay the principal for the first six months without having to pay interest.

Why does debt consolidation affect your credit?

There are two major reasons, although there may be other minor ones.

The main reason is that, generally, to consolidate credit card debt, you will have to apply for another loan. That implies that a new lender will factor into your credit score; on the other hand, your credit score gets reduced when you accumulate loans.

You might think that when you apply for a loan to pay off a credit card debt, you offset one transaction against another in your credit score: this is not the case. Remember that the first thing that will be considered is that you have yet to be able to assume the first credit and that you refinanced the second.

While it is true that a refinancing operation can be carried out to improve the conditions of the loan, or in this case of the credit card, it is also true that in the credit analysis, it will count as one more operation to be added. That is to say, subtract from your score.

Remember that the lender’s inquiry about your credit status may lead to a request for a credit report. This request may also be reflected in your score.

Potential credit damage

Another interesting aspect that influences credit when consolidating debt is the potential non-payment of the initial debt. When refinancing has been triggered by default, this is sure to be reflected in your credit history. In other words, even if you have just paid off the debt, your credit score will have an impact.

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The good news, in any case, is that if you pay the new loan continuously and without any additional problems, you will be able to recover a good part of the lost score. Beware, sometimes the companies specializing in debt reunification announce that this recovery is immediate, but sometimes this is not true. It is a long process: the lost credit score is not recovered from one day to the next.

When is it recommended, and when is it not recommended to consolidate credit card debt?

As we have seen, a credit card consolidation action will mean, in virtually all cases, some damage to your credit score. For this reason, it is very important to assess this type of operation well before carrying it out.

We will analyze some cases in which it may be convenient and others in which it may not.

Credit card consolidation may be appropriate when:

  • You can pay the debt with your own resources: in this case, by not resorting to financing, your credit score will not be affected at all.
  • When you have a stable income that allows you to pay the new loan back without problems: in this case, although your credit score may suffer some damage, you will recover within a reasonable period.
  • If you have a debt freeze proposal: with this option, not having to pay the debt immediately gives you time to reorganize your finances, and your credit score will not suffer. However, remember that at some point, you must repay the interest on the principal, so if you return to a debt situation, it will damage your credit.
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On the other hand, when all of the above aspects are negative, it may not make sense to perform a debt consolidation.

For example, if you have no resources and must resort to expensive financing, it will make little sense as you will end up paying more than you owe. It does not make much sense to apply for a new loan if you are not going to be able to pay it. In this case, it is much more appropriate to renegotiate the debt amount with the card issuer.

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