Considering Debt Consolidation? Consider This First

If you are considering a debt consolidation loan here a few things you may not know that could influence your decision.

Your credit score is a very important factor for the future of your financial situation. If your debt consolidation loan is a secured loan using your home as collateral, you may find that the balance due on your mortgage has been increased. This may or may not concern you depending on how much your home is worth and how large the consolidation loan is.

When you consolidate credit card debt the lending institution may contact your card companies to negotiate a lower balance in return for a payment in full. This may seem like a good thing however the credit card company may report this activity to the credit report agency resulting in a less than desirable mark. The mark you want on your credit report is "paid in full" however when a lower settlement price is negotiated the mark may be listed as "account closed by loaner" or "account paid as agreed."

When you account states "closed by loaner" it is a bad sign to other lenders. This signifies that you have become a risk and had to be cut off before you went further into debt. When your report says "account paid as agreed" it is a tell tale sign that this account was not paid in full and many lenders will interpret this as grounds to turn you down for another credit card, loan, or mortgage.

Obviously the best way of improving your credit score would be to pay off all your debts out right. You can then request them to report that your account is paid in full. If you do need to negotiate or if your consolidation lender intends to negotiate a settlement price you should at least put in a request for a mark of paid in full. Chances are the lender must follow company policy and report whatever their policy requires in which case you may want to know ahead of time in order to be prepared.

One the one hand, debt consolidation is a great way to get out of debt. A consolidation loan can lower your monthly payment as well as simplify your record keeping. On the other hand there may be a few pitfalls such as what marks will go onto your credit report from the debtors you are paying off with the consolidation loan and the effect these marks will have on your future endeavors. Either way one thing is for certain, reducing your debt will save you money.