If you are looking for help with debt or a poor credit score, you may have stumbled across a couple of terms that you haven’t heard before or that you don’t understand, especially when they look and sound very similar.
Let’s talk about the differences between debt consolidation and credit repair. We’ll discuss when you may want to use one or the other.
What is Debt Consolidation?
Debt Consolidation rolls all (or most) of your debt into a single monthly payment. You take a lower interest loan and then use that money to pay off your debts. The benefits come in a simpler bill schedule and a lower interest rate. However, since the interest rate is partially dependent on your credit score, you may not be able to qualify for it.
Debt consolidation has some pros and cons. First, you can eliminate late fees because your bills are paid in full by your loan. It can take time to find the loan and then to pay it off, so while the relief may be immediate, the time frame is not. Unlike other debt relief options available, your credit score usually will not take a hit from debt consolidation and there are no tax consequences. Always be wary of any company that promises a guaranteed interest rate before they review your information.
What is Credit Repair?
Credit repair is rebuilding your credit score. If you are to the point where you are considering debt consolidation, your credit score won’t be repairable until you have gotten your debt under control. There is no such thing as instant credit repair and anyone telling that there is, could be a scammer. Make sure you do your own research before working with anyone.
A quality credit repair company will be able to check your credit report and correct any mistakes. They will also check your report for debts acquired by an ex-spouse or someone with a similar name or birth date. If you have been the victim of identity theft, we strongly encourage you to work with a reputable credit repair specialist.
There are two fees associated with credit repair companies. There is a monthly fee and a signup fee. Credit repair companies are not allowed to charge you any upfront fees for work that hasn’t been completed, so any monthly fees you get charged for should be for work completed the prior month.
When Should You Use Credit Repair?
Once you have your finances under control and are paying down your bills you should begin credit repair. This is something that you can usually do yourself, you do not need to pay a company to repair your credit.
What affects credit? Your credit is based on a number of factors.
- Paying bills on time
- Paying in full
- Decrease the amount of revolving debt you have (debt ratio)
Repairing credit takes several steps.
- Check your credit reports and correct any errors
- Do not apply for new credit cards unless it is a secured card
- Pay off bills
- Reduce revolving debt by paying down credit cards
- Pay bills on time and in full
If you would like to speak with a live person who can answer your questions, consider contacting a debt specialist at Pacific Debt, Inc. We are not a credit repair firm, nor do we offer debt consolidation. However, we can help explain the advantages and disadvantages of all the options and help you to make the right decision based on your situation.
Disclaimer: Pacific Debt, Inc. is not a law firm and this article should not be construed as legal advice. Only a licensed attorney in your state can provide legal advice.