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Debt Consolidation and Credit Score: How They Affect Each Other

If you are struggling with a number of credit card debts, payday loans, or other debts, one choice you may be considering is debt consolidation. Making this move allows you to pay off your loans more quickly, reduce your monthly payments, or both. But you may also wonder how debt consolidation can affect your credit score. After all, the last thing you want is to add additional damaging items to your credit report.

The truth is that the method of debt consolidation that you choose has a lot to do with what impact it will have on your credit score. We’ll explore the various options you have and how they affect your credit score. We’ll start by looking at how debt consolidation works.

The Basics of Debt Consolidation

How debt consolidation typically works is that one loan, service, or credit card will pay off multiple loans, whether payday loans, installment loans, or credit cards. Rather than making payments to many creditors in the average month, you’ll instead make one payment to the debt consolidation organization. Debt consolidation is known for offering you a lower interest rate, reducing your monthly payments, and even shortening the time it takes to settle your debt.

There are a few different options for consolidation, which we’ll look at.

Debt Consolidation Loan

With an installment loan, you will be able to consolidate many types of debt, including payday loans, medical bills, and credit cards. These loans will have a particular payoff date and allow you to make monthly or biweekly payments. With an installment loan, you may be able to lower your interest rate and/or reduce your monthly payments so paying things off is a bit easier.

When it comes to credit score impact, any new credit is going to pop up as a hard inquiry on your credit report. This may have a small negative impact on your score, but it’s often negligible. Then, if you use the money from that loan to pay off your debts, that will cause your credit score to go up as utilization is improved.

However, be aware that this will only improve if you leave credit cards open after paying them down. When you close them, you will have a reduced credit limit, overall. This can actually bring down your credit score even more. However, continuing to make on-time payments to your debt consolidation loan will improve your score with payment history, one of the most important factors for your credit score.

Credit Card Balance Transfer

One way to consolidate debt, provided it is only credit card debt, is by transferring your current credit card balances to a single card. This is best accomplished using a new card with a low-interest rate, with the goal of paying the balance before the introductory period ends and the interest rate jumps.

Getting a new card will initially cause a small decline in your credit score, because of the hard inquiry. It can also cause a reduction due to changes in your credit utilization ratio. Having all of the balances in one place may drive your ratio higher which does drop your score. However, making timely payments will improve your credit score over time.

Debt Management Plan

A debt management plan, or DMP, is offered by a credit counseling agency as part of a plan that will include education about personal finance. Rather than giving you a new loan, the company will negotiate with your creditors for you. You will then make a single payment to the agency, who will ensure your creditors are paid. In many cases, you may be required to close accounts to avoid getting involved in any new debt.

As far as credit scores go, enrolling in a DMP will lead to a “DMP” notation on your credit report. However, this isn’t a bad thing. If you pay the agency on time and they pay your creditors, there will be no impact on your credit score, bad, good, or otherwise. However, closing accounts can affect your score, but this can be improved as you pay on time.

Debt Settlement Program

A debt settlement program is offered by lawyers and certain specialized firms and intends to reduce the amount that you owe. When you sign up for this type of settlement program, you will stop making payments on your debts and instead make payments into an escrow account that the lawyer or firm set up for you. Once you have built up a certain amount, the firm will get in contact with your creditors and offer to make a payment to get rid of the debt. This amount of money offered is less than what is actually owed. However, there is no guarantee that a settlement negotiation will go your way.

A debt settlement program has an impact on your credit score due to the potential missed payments while negotiating the debt. After the debt is settled, this will also show up on your credit report and is negative. The reason for that is it shows you did not pay the entire amount that you owed, which lenders prefer not to see.

Comparing Your Options

To sum it all up, a debt consolidation loan may cause a minor short-term drop due to a hard inquiry, but it will provide a boost from on-time payments and another potential boost from improved credit utilization ratio.

A credit card balance transfer may give you a boost from on-time payments but will also have a short-term drop due to a hard inquiry, as well as a worsened credit utilization ratio.

Debt management plans can boost your credit from on-time payments, but closed accounts can minorly drop it.

A debt settlement program can cause a lower credit score due to both settling, rather than paying the entire amount, and by missing payments while things are in the works.

If you are experiencing difficulty paying back your payday loans, never fear. There are options that can help. Consider speaking with the people at RealPDLHelp.com. They can offer you assistance and provide a free consultation.

Alternatives to a Payday Loan

Often, those who choose to take out a payday loan feel as if they have no other options. A payday loan can be quick and easy to obtain, which makes it seem like a good decision when someone runs into an urgent need for cash. However, many things make payday loans bad news, primarily the fact that they have high-interest rates and are due back in a short period of time.

We’ll look at some other options you might have besides a payday loan, so you have an idea of the alternatives that are out there.

Sell Some of Your Possessions

If you’re running low on money and need to pay a bill quickly, one option is to sell some of the things you own. Look through your belongings for things that are either unused or rarely used and consider the value they have. You may be holding onto some items for sentimental reasons, or you may simply have some things around the house that you have never gotten around to using.

Either way, it’s simple enough to snap a few pictures with a camera or your smartphone and then post the items up on Craigslist or a similar website. Another option is to drop by a pawn shop or see if any friends are interested in buying items you no longer need. While this may take some effort, it beats taking out a payday loan with the interest and stress it can cause.

Speak with Your Bank

If you’ve spent any amount of time with your current bank, they likely know all sorts of things about your finances – including your credit, income, accounts, and other personal information. This is why your bank is a good option if you want to consider a personal loan. You could also ask about a potential overdraft or credit card that you can use for your current needs.

Those who work at your bank can also let you know about any special programs or discounts that they may offer for individuals in your situation. It’s always worth asking as the worst you can hear is no, and if the answer is yes, you could end up saving money rather than being forced to deal with a predatory payday loan company.

Consider an Alternative Bank

With so many banks out there in the world, it’s no surprise that they are often working hard to get people to switch from their current bank to the new bank. Some of these banks will actually pay you money for opening an account or offer some other sort of perk. You may have to make a deposit to qualify, but it’s certainly something to consider. Sometimes these opening perks can make you $100 or even more.

Crack Open Your Savings

While it’s best to leave savings where it is, if you are in financial straits, it can sometimes be worthwhile to borrow money from your savings account. If the choice is savings or a payday loan, there’s no contest. Borrow the savings money. Take a look at your savings account, if you have one, and determine how much you can take from it to reduce your current debt.

This is a good idea only if you commit to replacing the money and if it will help you avoid the high-interest rate that a payday loan is known for. The great thing about this option is that it’s interest-free. However, you can commit to repaying it and even pay yourself interest until your savings account is back where it was.

Talk to Your Creditors

If you’re having issues paying off a bill or two, sometimes the best option is to speak with your creditor, rather than chaotically attempting to find a way to handle the situation. You can ask about an extension, penalties, and possible resolutions. You may be able to put off a payment or pay a larger amount later, if that helps in your situation. Some creditors have penalties for defaulting a payment, but these can vary from an extra charge to an increased interest rate. If that’s the case, you may want to sit down and do the math before determining the best option.

Emergency Assistance Programs

When all else fails, you may be able to find support in your own community. Social groups, faith-based organizations, and other places often give out emergency help to those who need it. This may take some time to set up and get going, but it’s sure to be a better option than choosing a payday loan, which will bring its own payments and sets of problems with it. Consider programs like the Low-Income Home Energy Assistance Program (IHEAP) and others like it; they may be able to pay one or more of your bills or point you in the direction of further help.

Credit Card Cash Advance

If you have a credit card, you may qualify for a cash advance which is an excellent alternative to a payday loan. In fact, some credit card companies specifically look to help those with financial problems or less than excellent credit. Cash advances will have an interest rate attached, but it’s likely to be less than the interest rate on a payday loan. You’ll also typically have longer to repay it so that you can avoid some stress. In addition, if you pay the balance off in the same billing statement, you can often completely avoid that interest charge.

Some of these options may work for you and your situation, while others may not. The important thing is to consider all the possibilities – whether that’s having a yard sale, borrowing money from friends, or signing up for an account with a new bank.

Those who already have payday loans, and who may be struggling to pay them, should consider a payday loan consolidation service, such as the one at RealPDLHelp.com. Consolidating a number of loans can save you money and put you on the road toward financial success.

What are the Advantages of Payday Loans

When you are in an extreme financial pinch, payday loans, also called cash advance loans, check advance loans, post-dated check loans, or deferred deposit loans, seem like a quick and easy solution to tide you over temporarily. You need to pay rent, come up with cash for a medical emergency or want to avoid a late payment on a credit card. We’ll get to why payday loans should be your absolute last resort, but let’s talk about why they seem appealing

You can get money fast.

Whether you apply online or in person, the forms are easy, straightforward, and require fairly little information. You can usually get approved within minutes, and generally, you can get your cash on the same day or the following. Sometimes, you can even get funds within the hour.

The loan process is convenient.

No appointment necessary. You don’t have to set a meeting with your bank’s loan officer or provide extensive information that may require some personal research. The forms are easy, and you can even apply for a payday loan online. And unlike traditional loans, which often dictate how you spend your money – i.e. you get a mortgage to pay for a house or car loan to purchase a car, payday loans can be used for anything: bills, repairs, credit card payments, etc.

There are few requirements.

Unlike some traditional loans, you don’t have to put up any collateral, like a house, or have a perfect credit score. The basic requirements for a payday or cash advance loan are the validation of a steady income, a checking account, and proof you are 18 years or older and that you are a permanent resident in your state.

While these factors make payday loans seem like an ideal way to get cash quickly and easily, the detrimental debt spiral they often cause, make these loans the least desirable form of borrowing.

When you take out a payday loan, you generally write the lender a check for the amount you are borrowing, plus a fee, or you give them permission to withdraw the loan amount from your bank account on your due date. When that day comes around, your loan amount is automatically deducted from your account. If you don’t have the funds to cover it, a few things will happen:

  1. Your bank charges you a Non-Sufficient Funds (NSF) fee, usually $38-$45
  2. Any time you try to write a check or pay a bill from your account, you continue to get hit with NSF fees for EACH attempt
  3. Your payday lender will hit you with another fee plus interest, which can be exorbitant, anywhere from 300-450%

Your seemingly simple and convenient loan has just skyrocketed to more than five times what you borrowed, and you still have to pay it all back. If you can’t, you will incur more extension fees from your lender, add more interest that you need to pay off and likely will incur more NSF fees from your bank because you gave your payday lender permission to continue making withdrawals when you signed up for the loan.

When you understand how a simple, small loan can immediately escalate out of control, the so-called advantages are no longer worth it.

Payday Loan Alternatives

Before you resort to taking out a payday loan, consider other options:

  • Talk to a bank or credit union. While this process takes longer than the cash advance loan, the fees, timeline and interest rates are not as predatory.
  • Ask for an advance from your employer. Talk to your human resources department or business owner; since this is an advance and not a loan, there is no interest.
  • Look into Emergency Assistance. The Low Income Home Energy Assistance Program (LIHEAP) is a federally funded assistance program that helps families in managing costs associated with utility bills, energy crises, and energy-related minor home repairs.
  • Borrow from friends and family. While asking for money from those you love is a difficult and awkward situation, the discomfort far outweighs the perils of a mountain of debt.
  • Sell items on Craigslist, eBay or go to a pawn shop. Sell anything of value, including toys, tools, clothes, furniture, and appliances.
  • Sell your car. If public transportation or carpooling is an option, give up your wheels.
  • Get a roommate. Being able to split rent and utilities will allow you to save.
  • Take a cash advance on your credit card. While a credit card cash advance is not ideal due to its high-interest rates, it’s still much less expensive than a payday loan.
  • Set up payment plans with your other creditors. If you have medical expenses, taxes or other bills, call them and see if you can set up small monthly payments that you can afford.
  • Look into a Life Insurance Loan. Some policies provide for loans if you have cash value in the policy.
  • Get credit counseling. While this is not an immediate solution, talking to experts who can help you set up a budget will put you in control of your financial situation.

The Bottom Line

The disadvantages of payday loans aren’t just inconvenient; they can be absolutely detrimental and devastating to you and your family’s financial well-being. There are many more options that might take more time or willpower, but one or more of them are worth considering.

Ultimately, learning how to budget and save is a necessity in moving forward. While this process can seem overwhelming, the first step is simply writing down all your expenses, seeing where you can save and come up with a plan. There are many budgeting templates online that can get you started.

If You Owe a Payday Loan, Can You Get Another

The chances of getting a second payday loan before paying off the first one is very low. Lenders can see that you already have a loan and will not approve you for another. There are some payday lenders that will extend a second loan, but you don’t have to dig too deep to realize why getting a second loan could be seriously detrimental to your finances and overall well-being, and no, we are not being too dramatic here. Let’s take a look.

A payday loan, sometimes called a check advance loan or cash advance loan, seems like a harmless and easy fix. You are a little short on cash and have some important bills to pay. A payday lender can get you cash quickly, usually $500 or less, without much hassle or a credit check. While the extremely high interest rate of upwards of 400% should alarm you (in 2017, the average personal loan interest rate was between 10% and 28%), you are committed to paying it back by your next paycheck. But what happens if two weeks roll around, and you don’t have the funds to do it.

Example: Take out a loan of $500 with a two-week term and an interest rate of 400%. If you don’t pay it back by the two-week deadline, you will now owe the original $500 plus interest, and the cycle continues if you continuously do not pay back the loan.

Lenders will generally not give you another loan to pay off the first one, but they might extend the terms of the first loan or increase the amount if you call them and explain your situation. The problem is that issuing a second loan is not necessarily an act of kindness. You will now will undoubtedly, plunge yourself further into a debt spiral you may not get out of.

Taking our example above, if you requested a loan extension on your loan due date, you’ll owe your original amount plus interest. To extend that loan, your lender will likely charge you a fee of $25-$45. In addition to that amount, it is likely that you gave your lender permission to pull the original loan amount from your checking account, which will likely put your account in a negative balance. Any checks or bills paid from that account that bounce, will occur a Non-Sufficient Funds (NSF), which average at $35 for each check that bounces. If in our example, if you bounced four checks, you would need to add another $140 to your debt.

While creating a budget and figuring out where you can cut costs are you two main goals, if you are considering extending your original pay day loan, one can assume that you are in a precarious situation and need money quickly. Rather than trying for another loan, consider other options:

 

  • Offer to run errands or perform odd jobs for family, friends and neighbors.
  • eBay: Sell anything from books to clothes to toys to car parts to car parts online.
  • CraigsList: Much like eBay, you can sell anything, but folks will pick it up locally.
  • Sell items at a pawn shop.
  • Have a garage sale.
  • Field Agent: An app that you download to your phone that pays you to complete jobs like checking prices and scanning bar codes in stores.
  • TaskRabbit: This site connects you with local people willing to pay you for a wide variety of tasks — from light carpentry to picking up takeout food.
  • Thumbtack: Similar to TaskRabbit, this site is also for people looking for help with odd jobs or professional skills in home improvement, education or wellness.
  • UserTesting.com: They will pay you $10 via PayPal for every 20-minute video you complete by looking at websites or apps, completing a set of tasks, and speaking your thoughts aloud.
  • Uber, Uber Eats or Lyft:  If you’ve got a car, put it to use with this service that’s an alternative to taxis and food delivery.

 

Ultimately, the best thing to do if you find yourself buried under debt is to contact a loan consolidation company like Real PDL Help and work with experts who have decades of experience helping everyday people with their finances. Even if your initial loan was small, you can see how it can quickly swell into an amount far beyond your means. The counselors at Real PDL Help will work with both your lender and you without judgement to help you pay back your original loan and set yourself up for future success.

A loan consolidation company will:

  • Guide you through the process of getting payday lenders out of your bank accounts.
  • Help you establish a budget, based on your income, that will enable you to settle all your payday loans.
  • Consolidate your loans and reduce your debt so that you aren’t piling on fees and debits.
  • Resolve your payday loans once so you can move on with your life.

 

Are Payday Loan Consolidation Companies a Scam or Legit

Once you are in the payday loan debt trap, it’s difficult to get out. It’s likely that your bank is being auto drafted by your lender, which is probably generating expensive Non-Sufficient Fund (NSF) fees, you may be taking out more payday loans to cover your bills, and your original loan amount has skyrocketed. The intense stress that has resulted from your financial situation is undoubtedly affecting your personal and family life, and ability to manage the rest of the balls you juggle every day.

You know the only way to stop the money hemorrhage is to stop taking out more loans, but that might seem impossible, and the thought of creating a budget for yourself, overwhelming.  While it may feel more “noble” or even “cheaper” to just dig yourself out on your own, in the long run, it will be less expensive and better for your sanity to bring in an expert.

Loan consolidation companies do just this – they help you establish a budget, combine your various loan payments into a reasonable amount while negotiating with your lenders so that you can have some relief. Ultimately, their job is to reduce your anxiety and put you back in control of your finances.

At Real PDL Help, the loan consolidation process starts with an evaluation of your current income and debts, to create a workable budget, one that you understand and can stick to. The experts at Real PDL Help have been in this industry for decades, and know the in’s, out’s and tactics that lenders may use when working with pay day loan borrowers.

While loan consolidation companies like Real PDL Help are truly in the business of helping others, there are some unsavory options in the marketplace. To ensure you are working with a debt consolidation company that is reputable, do your research. Check their ratings with the Better Business Bureau, make sure that any complaints are legitimate and/or have been resolved, read their online reviews and see how long they have been in business.

Be wary of any company that tries to offer options other than debt consolidation, is aggressive, or makes you feel uncomfortable in any way. Trust your gut.

Do not work with any company that requires an upfront payment. As per the Federal Trade Commission, it is illegal for debt relieve companies to ask for an “advance fee,” and can only charge once there has been a successful settlement, and the borrower has made a payment towards their revised payment plan.

Do not work with any company that says they can completely eliminate all your debt. Having your entire debt eliminated is nearly impossible, except in extreme cases of death or disability, unless you declare bankruptcy, which is a process you would need to discuss with an expert. Companies that claim they can make it “all go away” are operating on false promises.

Be wary of non-profits offering to consolidate your loans. The FTC has exposed so-called non-profits that were actually funneling funds to a for-profit company. Understandably, non-suspecting victims are more willing to trust a non-profit, so do your research to make sure they are legit.

The bad apples notwithstanding, working with a reputable loan consolidation company, such as Real PDL Help, will give you peace of mind and a favorable outcome when it comes to getting your finances under control. Most companies will offer a free consultation, so be sure to ask questions such as:

Q) Is there an upfront fee?

A) The answer should be a definitive no.

Q) What is their process from start to finish?

A) If they can explain it, that means they have a well-founded and legal system to get your financial footing back.

Q) Are their services customized to each client?

A) While systems are important, you need to know that you are not being put in a once-size-fits-all plan. Your advisor should be working with you as an individual with a customized plan based on your specific budget and debt.

Q) What will they need to understand your budget?

A) You should not have to offer up bank account or social security numbers but understanding monthly income and expenses to help you form a plan can help your long term financial goals.

Q) Will they contact lenders on your behalf?

A) Do they intercede; will they be able to stop the incessant calls and negotiate an effective solution with your lender.

Q) How will they get payday lenders out of your bank accounts?

A) Make sure you have appropriate expectations of their deliverables and the timeline.

Q) How well will they educate you on your finances?

A) This is key. You need assurance that you will be able to manage your budget and not find yourself in a similar situation down the road.

Q) How, when and how much do they get paid?

A) Again, there should never be an upfront fee, but understand the fine print so you are not surprised by any costs.

Should you find yourself working with a predatory loan consolidation company, report the fraud immediately with the Federal Trade Commission (FTC). You should also file notices with the fraud departments at the three credit bureaus, Experian, TransUnion and Equifax, as well as contact your bank.

Ultimately, there are many reputable loan consolidation companies who can and will help you get out of the payday loan debt spiral, create peace of mind so that you can move forward in your life and educate you on how to take control of your finances.

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