Debt Consolidation Loans a Drag On Consumers’ Credit Scores |

Debt consolidation loan might be the answer, if you are struggling with an ever-mounting monthly debt. However, before you take on one of these loans, you should consider every other option. That’s because debt consolidation loans are known as credit-score killers. When you take out one of these loans, your credit takes a big hit. And today, when auto and home lenders rely so heavily on credit scores, taking out a debt consolidation loan may prevent you from buying your dream home or car in the future.

Raising the Standards

It used to be that a credit score of 720 was considered top-notch. Borrowers with this score or higher would qualify for the lowest interest rates, whether they were borrowing money to buy a house or a new car. Today, though, this has changed. A recent story in CNNMoney reported that lenders have raised the standards for a top credit score by 20 to 40 points. This means that borrowers who want to qualify for the best interest rates now need a credit score of 740 to 760. This hardly seems fair; in today’s dismal economy, more consumers than ever are struggling to pay their monthly bills. Now even small dings to their credit history will knock their scores down enough so that they won’t qualify for the best mortgage interest rates.

Keeping Your Credit Strong

There is no secret to keeping your credit score strong. Basically, you need to pay your bills on time, not default on any of your loans and pay down your revolving debt. If you do this consistently, your credit score will steadily rise. However, if you’re facing financial difficulties today, you’ll have to make a difficult decision: Do you take out a debt consolidation loan to keep the creditors at bay knowing that it will hurt your credit score? Or do you try to pay off your debt on your own terms, taking the risk that, should your financial situation get even worse, you may default on some of your loans, hurti ng your credit score by an even more significant factor?

No Easy Answers

Unfortunately, there are no easy answers to this question. The decision to take out a debt consolidation loan is a personal one. If your debt is causing you to lay awake at nights, is negatively impacting your relationship with your spouse or family members or is causing you to be less productive at work, maybe a debt consolidation loan is the wise choice. If you can get your debt under control, despite the immediate hit to your credit score, you can then begin repairing your financial health.