All right. First, you guys have to understand what debt consolidation is, so I’m going to talk about a few of the positive side of things going with debt consolidation, and then we’re going to talk about some of the things that I feel are real behavior negatives about doing the debt consolidation.
A lot of clients are asking is debt consolidation/bankruptcy a good move or a bad move?
For today’s topic, we’re going to talk about how to raise your credit score by doing debt consolidation. But first, understand that there are different types of debt consolidation.
One is a standard fixed loan, so standard loan where in essence you’re taking your revolving lines. We’re going to do a couple of examples so I can really paint a picture for you guys of what debt consolidation is and the different forms.
The two most prevalent forms of debt consolidation are, A, you get a loan and you take your revolving credit cards, let’s say you have 10 credit cards. In my case, 42 credit cards.
If you took 42 credit cards or 10 credit cards, what’s the benefit?
Well, number one, you don’t have to make all those payments and remember to make those payments each month. Huge positive.
You take 42 cards in my case, put them into one consolidation loan, and then I’m only making one payment per month instead of 42. Huge benefit.
What is another benefit of doing a debt consolidation?
Well, the main thing is you want to lower your interest rate.
Typical credit cards are anywhere between 15 to 18, 19% interest rate. But on debt consolidation, if you can get that down to the 5, 6, 7, 8% interest, are you kidding me? It’s a huge saving for me.
Thousands of dollars a month for me to be able to take 42 credit cards … that I use by the way. I use them respectfully for the purpose of building credit, not to over-leverage and spend on TVs and EZs.
But, that being said, it’s very important that you understand why debt consolidation is put in place first.
Number one, it takes you from revolving.
Your credit cards are revolving line, which means that every time you use the credit cards, the payment will fluctuate.
Basically, it’s going to fluctuate between how much you use of the debt that’s on the credit card, so your payment will be different every month.
When you get into a fixed payment, a loan, debt consolidation, you’re taking all the debt from the credit cards and you’re saying, “Hey, put all this debt into one payment.” Phenomenal, phenomenal idea.
Now, let me talk about a negative first, and this is where a lot of people get in trouble.
They move their credit cards into a debt consolidation loan, and then they still use the credit cards.
Then what’s going to happen is if you don’t change your behavior, what can happen is now you’ve got a payment, because it’s a fixed payment, so a fixed payment on your debt consolidation loan.
Now you’re using your credit cards and now you got two payments.
So, I only recommend doing a debt consolidation is if, A, you’ve got a good job. Maybe you know that you’re getting a bonus for taxes or maybe you’re getting a bonus at work and you’re like, “Look, I see the tunnel at the end of the road.
I can see that light, and what I want to do is I want to put all my credit cards into a debt consolidation because I know I’m about to get a massive payment, and I can pay it all off.”
So, the question is how does doing a debt consolidation actually raise your credit score?
Well, first we’re going to talk about one other thing first.
We’re going to talk about bankruptcy. Understand that bankruptcy is not the first option.
Always go with debt consolidation first.
Put them into one loan to help you with your better interest rates. That’s the idea, whereas bankruptcy basically just wipes out the debt.
What happens is you lose all of the accounts, so you lose the accounts, A, and B, you lose all the age of the accounts, dramatically dropping your score.
So, bankruptcy is not my first choice. If it is an absolute must, then you have to do what you have to do, but debt consolidation would be my first pick.
Think about this from a behavior standpoint is that if you’re responsible with your payments, and you’re like, “Look, I got 30, 40, 50% utilization, and I can go into debt consolidation.”
Let me tell you one main thing that’s going to help you raise your credit score.
If you took all your credit cards and put them into a debt consolidation loan, how do you think that’s going to raise your credit score because 30% of your score is contributed by utilization.
Think about this for a minute. 30% of your score is by utilization of your credit cards.
Now you take those credit cards and, boom, they get put into a loan, and dramatically your score should increase because you are lowering the utilization on all those credit cards because it’s being paid off by the loan.
So, a huge increase in score happens when you do debt consolidation.
Let me talk about another way you could do this.
If you have credit cards, a lot of these credit card companies … And they’re trying to compete with themselves.
There are so many companies that do this … but they give you like a 12-month 0% APR.
Some of them are like 2%, 4%, but there’s a lot of them out there that will do a 0% APR.
And what that means is you could take your debt from, say, your Discover card, and then you can open up a credit card with Barclays that has a 0% APR for 12 months and transfer the debt that you’re paying over here.
Your interest rate over here on your Discover maybe is 18%, and you got $5,000 on a $10,000 limit.
What I would do is a balance transfer.
Move that $5,000, that debt, onto your Barclays account, which has a 0% interest rate. Now you’re not paying any interest over here and your Discover card is actually paid off, so it’s saving you, it could be 100, 200 bucks a month.
I mean, it could be a lot depending on how many cards you have.
So, think about debt consolidation from the balance transfer side, which if you do it too many times it just becomes a game.
You’re just learning how to move money around and really leverage 0% interest rate cards.
In my case, I did it for years. I just moved … Once you learn how to do it, you can just move your debt over to different cards, and you end up never paying interest.
But again, it becomes a game, and it becomes a lifestyle, and you just have to like really stay up with it.
So, if you got a couple of credit cards that have high interest, move them over.
Do a debt consolidation. Open up something that has a 0% APR, and then make sure that you do your research and due diligence first, and you’re like, “Okay, cool. This card has 0%. I want to open this up for the specific reasons for taking my debt on several other cards and moving it on to 0%.”
Now, understand that’s only for 12 months.
Most companies only do it for 12 months. So, the downside is in that 12-month period, if you’re not stable, don’t have a good job, or maybe you’re kind of missing payments here and there, if you miss a payment, that 12 months go away.
Miss one payment, and now you’ve got a credit card that you don’t have the 12% because they penalize you for that.
That is one downside to it.
What I want you to understand here is this.
If you guys have credit cards and you’re paying high interest, you’ve got a couple of options.
A, open up a consolidation loan. A debt consolidation loan can raise your score because it’s going to lower utilization because all those credit cards then get paid off, which dramatically lowers your utilization, which means your score goes up because it’s the second biggest factor in your credit model.
Payment history’s number one, then utilization’s number two.
So, if you could lower all that utilization from all that debt, your score is for sure going to increase.
And number two thing I want you to take away is that the debt consolidation loan is a good thing, but also, if you have decent credit, open up another credit card with something that has a 0% APR, and then just transfer the debt from your other credit cards onto 0%.
And a phenomenal another way of really just … Really, on that side of things, it’s for saving money, because the debt’s going from one to the other. Yeah, you want to …
In essence, it’s not going to raise your score, though, too much, because you’re taking 5,000 debt, we talked about a Discover that has 10,000 limits, 5,000 debt, and you’re moving that $5,000 onto another card.
So really from the standpoint of debt, it’s taking that debt and putting it onto another card. Your score’s not going to dramatically increase, but what it is going to do is save you money.
So if it’s more of a money-saving thing, you could do a balance transfer.
For raising a score, though, you have a lot of credit cards, or even three, four credit cards, I would recommend this.
Take it, open up a debt consolidation loan, and then pull the balance over, and it’s going to drop all those because it’s paying it off, and then you only got one payment.
And also, from the standpoint of peace of mind, you only got to make one payment a month.
I got 43 credit cards. Do you think I have time to go through 43 credit cards every month?
I mean, I have done it. I’ve got spreadsheets that I keep, and I’m like, “Okay, what do I need to pay?” But most people don’t have the responsibility of doing that.
And anytime you have one payment versus 43, it lowers your chance of messing up.
So let’s talk about this for a minute, because here’s a downside, because I know a lot of you are like, “Well, I want this. I want to do it.”
It’s not easy to get a debt consolidation loan.
Number one, most companies are looking anywhere between 630 and 650 credit score. If you’re in the 500s, there are some options, but you’re going to pay a much higher interest rate, which then goes back to the question, why would I move the debt from high interest to one loan?
Well, yeah, because chances are it’s a little bit easier to manage one versus 10 credit cards, but the idea is to save money and to raise your credit score.
So, 630 to 650, that’s where you want to be.
In that range, debt consolidation companies are loving you guys that are applying.
That’s kind of where they want you to be. That is one negative and con side is it’s not for everybody, but it does help out a lot of people.
Now, let me give you guys a bonus tip before I leave.
There is a company between the credit scores of 580 and a little bit higher, so if you’re down in the 580s and you’re like, “Oh man, I’m not quite at that 640 marks,” there’s a company that I’m going to give you guys between 580 and 640 called Upstart.
6% all the way up to 23% interest rate, and they do a three to five-year loan and the reason I recommend Upstart is because they look at outside factors: employment, education, and your income.
They don’t just look at your credit score.
They take other factors into consideration when giving you this loan.
So, I’m going to leave you with that tip that you can try Upstart if your credit score is lower than 640, and I’ll leave you with this.
If you want to raise your credit score, there’s a couple of ways you can do it.
AdAge Tradelines, the fastest and smartest way to raise your credit score, debt consolidation to save money and to raise credit score, and combing through your credit report, guys.
Comb through it, see if there are any negatives. Challenge the information that’s negative.
If you guys need help with any of this, please feel free to call 904-515-6698. We do it day in and day out.
That’s why I do these videos because I want to educate you guys in what we call the credit game, and understanding credit and understanding the game, you can understand how to leverage and beat the system.
Thank you, guys, for watching Tradeline TV.
My name is Mike.