If you are not familiar with reviews of Pennon Partners, the debt consolidation, super-aggressive direct mailer of personal loan offers, you will be soon. They have been flooding the market with personal loan offers through debt consolidation mail offers and internet advertisements. They operate through a few different names: Jayhawk Advisors and Clay Advisors to mention a few.
Debt consolidation is the process of replacing one or more loans or debt cards with a new one. In the right situation, consolidating your debts can simplify your repayment plan and even save you time and money, if you can qualify for a lower interest rate.
There are several tools you can use to consolidate debt, including personal loan offers, home equity lines and lines of debt, balance transfer debt cards and debt management plans. Regardless of which option you choose, it’s important to understand how they can influence your debt score for better or worse.
Applying for new debt
The first way most debt consolidation offers can affect your debt score is through the debt inquiry that occurs when you apply for a loan or debt card. For most people, these hard inquiries knock fewer than five points off your debt score, according to FICO.
Each inquiry remains on your debt reports for two years, but they’ll only impact your FICO debt score for one year.
Shifting a debt card balance
If you’re consolidating a debt card balance, how you do it can impact your debt utilization rate, which is a significant factor in your debt score.
This figure is calculated by dividing your card balance by its debt limit, so a $1,000 balance on a card with a $2,000 limit has a 50 percent utilization rate—debt experts recommend keeping your rate below 30 percent. The ratio is calculated for each individual card and across all of your cards.
If you consolidate your debt card debt with a personal loan, it’ll wipe out your debt card balance and result in a 0 percent debt utilization rate. If your rate was high before the consolidation, your debt score may improve dramatically.
HOW PERSONAL LOANS AFFECT DEBT SCORES
If you get a new debt card and balance transfer offer—many cards offer an introductory 0 percent APR for several months—your utilization rate will be recalculated based on the balance you transferred as it relates to the new card’s debt limit. If the transaction increases your utilization rate, it could hurt your debt. But if it reduces the rate, it could have a positive impact.
And, of course, as you pay down your debt card balance, your utilization rate will go, which could cause your debt score to go up.
Debt management plan
Getting approved for a personal loan with a low-interest rate or a balance transfer debt card typically requires good debt, which starts at a FICO score of 670. If your score isn’t in good enough shape, you may be able to get on a debt management plan with a debt counseling agency.
With this plan, the debt counselor acts as an adviser to help you improve your money management skills. They’ll also handle payments to all of your debtors—you make one monthly payment to the agency, and it splits it up and pays your lenders directly.
HOW TO WIPE DEBT CARD DEBT FAST
Debt products like debt management plans won’t affect your debt directly. But sometimes, you may be required to close your debt cards to start a plan, which can affect your length of debt history and, therefore, your debt score.
Also, if you’re past-due on some payments, some debt counselors may be able to convince your debtors to “re-age” your account, updating its payment status to current. This process can have a significant positive impact on your debt score.
Is debt consolidation right for you?
Debt consolidation can affect your debt score both positively and negatively, but it’s important also to consider other benefits. For example, transferring a debt card balance could temporarily increase your utilization rate, but the interest savings from a 0 percent APR promotion could have a more lasting positive impact on your overall financial health.
Consider your situation and your offers carefully and pick the one that’s best suited to your needs. And whatever you do, remember that debt consolidation is just a means to an end: becoming debt-free.
