Every person is well aware of the dangers of payday loans, high interest rates, and how easy it is to get caught up in a vortex of debt. The fact remains that although lenders advertise short-term loans as an emergency source of funds, close to 70% of borrowers need to funds to cover the essentials of everyday living such as rent, groceries, and gas. Statistics revealed by Credit.com also show that the typical payday borrower is likely to remain in debt for 5 months in a year. If this is you, know that breaking the vicious cycle is possible with debt consolidation. And, with a few smart steps, you can repair your credit score and make the transition to a debt-free life.
Understand the Difference Between Debt Consolidation and Debt Settlement
When exploring your options, you’ll learn about debt settlement and debt consolidation to help you clear your payday loan dues. Here’s how your credit score will stand at the end of the process.
Debt Consolidation
Debt consolidation is a procedure where you’ll combine all the debts you owe to different creditors into one lump-sum loan that you can pay off easily. Like the folks at Real PDL Help advise, you can choose from different low-interest loan options and use the amount to clear all other debts including payday loans. As long as you continue to make regular payments toward the loan, you’ll steadily build credit scores. Further, you’ll lower the credit utilization ratio on your record. Credit utilization is how you make use of the credit available to you. When you open a new credit account and use the funds wisely, you’ll project that you’re responsible with any loans you take.
Debt Settlement
As this feature on Investopedia explains debt settlement is where you come to an agreement with your creditors. During the negotiations, lenders agree to waive off a part of your loan and accept a smaller amount to consider your debt account closed. While you can get away with paying a lower sum than you owed, the process could have a serious negative impact on your credit rating. The next time you want to apply for a loan, potential lenders will recognize the settlement as an indication that you’re not good for any funds you borrow. If you’re applying for debt settlement, chances are that you’ve already fallen behind too many payments in the past. If that’s true, you might already have a bad credit rating. For this reason, your lenders may not be open to settling your debt.
Your Credit File Contains Detailed Information
Do keep in mind that whether you’re applying for debt settlement or debt consolidation, any creditors you contact will get a detailed history from any of the three apex, credit-reporting organizations such as Experian, Equifax, and TransUnion. The file will contain a list of the loans you’ve taken in the past, the current status of whether or not you’ve paid back, and the terms and conditions on which credit was given. The amounts you’ve paid back and due dates of each payment will also be in the record just as this article on Equifax outlines. In case you request for debt settlement, your file will carry the information for 7 years. At the end of this period, the record is removed or you can request to have it deleted.
Try to Plan Your Dues and Clear Payments on Schedule
Check the dues you have outstanding and make sure you can pay on schedule. It is always advisable to arrive at a solution before your credit history takes a hit. If you don’t have funds, contact the lenders and creditors and inform them. If they settle for a particular amount at no loss to either the debtor or lender, the account can be closed with the notation, “As per agreement!” As a result, you’ll avoid the black mark of non-payment. Most loan payments and bills have a 90-day payment cycle that you can use to your advantage. Payday loans are typically given for two or four weeks, whenever you’re likely to receive the next paycheck. But, lenders typically allow you to apply for an Extended Payment Plan where you’ll pay back the dues in smaller installments over a longer period.
Debt Consolidation is a Smarter Option
Given a choice and your abilities to clear all debts including payday loans, you may want to choose debt consolidation. Here are a few tips to use when rebuilding your credit score even as you pay back the consolidated debt.
- Opening a new account to pay off all your loans will reflect on your report as a mark of trust. But, any lender offering you a personal loan or a credit card will conduct a hard inquiry that may lower your scores for a short while. As long as you continue to make regular payments toward the consolidated debt, you can steadily raise your scores.
- Maintaining old credit cards even if you’re not using them is a positive mark. Old, unutilized credit shows that you’re responsible with loans.
- Each payment that you make toward past dues reflects positively on your report. As you clear each bill, your credit goes up.
Best Low-Interest Options for Debt Consolidation
Some of the best solutions for clearing debt with consolidation include:
- Taking a low-interest personal loan
- Taking a 0% interest credit card where you can pay back the dues during the no-interest introductory period. Keep in mind to clear all dues before the payment cycles or you risk incurring high interest rates once the interest-free period ends.
- Line of credit against home equity
- Applying for loans against your retirement fund can also work for you. But, CreditKarma recommends that you pay back on time or you risk fines and taxes.
- Taking interest-free loans from friends and family members
Repairing your credit score after debt consolidation can be a difficult road. You’ll also need to make some tough lifestyle choices to remove the black mark on your history. But, the steps you take will be well worth the effort in the long run. Consult an expert professional for advice on how exactly this can be done.
