What is the difference between credit repair and debt consolidation?

May 23, 2022

What is the Difference Between Credit Repair and Debt Consolidation?

Student loans, unpaid credit, car loans, and mortgages can make it hard for you to enjoy some finer things in life. You may not travel as much as you would and starting a family can seem like a burden. To get out of these debts, you may be considering credit repair services or debt consolidation. But what is the difference between credit repair and debt consolidation?

Difference Between Credit Repair and Debt Consolidation

Credit repair and debt consolidation both help you improve your credit score, albeit through different processes. Here are the differences between the two;

Debt Consolidation

If you have several debts, you may forget to pay off some of the loans hurting your credit score. Debt consolidation enables you to have only one debt instead of having several. It involves taking a new loan to pay off multiple smaller loans in one go. You may need to take out a personal loan or use home equity loans to pay off the other debts.

 

Whether you choose a personal or home equity loan, you will have to compare interest rates from different lenders to see which one has the best deal. And when you receive the loan, you will pay off all your debts and start paying the new loan.

 

  • One monthly payment. With all your debts consolidated, you only have one monthly payment and one set of interest rates instead of several payments and interest rates with different creditors.

 

  • Lower interest rate. If you find yourself with a lot of high-interest credit cards or other types of debt that charge exorbitant rates, consolidating it into one loan can help reduce your overall interest rate because it’s easier for lenders to give out loans at lower rates than individual ones. This can save you money in the long run if your original loans had high annual percentage rates (APRs).
  • Improves credit score. When you apply for debt consolidation, there will be a hard inquiry on your credit report, which means your credit score will dip. However, your credit score will start improving as you pay off revolving lines of credits, e.g. credit cards and when you make on-time payments,
  • Streamlines payments. Consolidating your debt into one eliminates your chances of missing a payment. You will only have one payment to make a month, and you will know when you will finish paying off your loan to start a debt-free lifestyle.

Disadvantages of Debt Consolidation

 

  • You may have to pay more interest. If your credit score isn’t high enough, you may qualify for a loan with high interest. The interest rate charged on debt consolidation loans is usually higher than that charged on other kinds of loans, such as home equity loans or second mortgages. This means that you will end up paying more interest charges in the long run.
  • There will be a hard inquiry. Hard inquiries will have a negative impact on your score.
  • You may lose your assets. If you decide to take out a personal loan for debt consolidation, it is possible that your creditor may ask for collateral from you. In case you fail to repay the loan or make late payments, your creditor may sell off your assets as payment for the loan. This could mean losing your home or other valuable possession that can be sold off easily at market prices.
  • It can create more stress than it relieves. It’s easy to get addicted to debt relief programs because they make us feel better temporarily and make us think we have solved our financial problems when in reality we haven’t really done anything about them yet – we’re just putting them off for another day!
  • May be costly. When you apply for a debt consolidation loan, ensure you know of the added costs before you accept to sign the agreement. Debt consolidation comes with additional costs such as balance transfer fees, annual fees, and annual fees. Thus, the need to understand the terms and conditions when looking for a lender.
  • Closed accounts may hurt your score. The age of your credit account makes up 15% of your credit score, and closing old accounts will lower the average age of your account.

Credit repair

Credit repair is a service that helps you to improve your credit score and repair credit reports. Credit repair companies will typically help you remove inaccurate information from your credit report, dispute incorrect information with creditors or the credit bureaus, and help you to obtain copies of your credit reports for free.