Consolidation Payday Loans And Its Effects On Your Credit Score
Consolidation payday loans can prove to be very helpful when it comes to paying off the otherwise unmanageable and impossible-looking payday debt. But, before you sign up with any consolidation program for this purpose, you must first have a thorough understanding on how it is going to affect your credit score. Though consolidating your debts is a great way to get control of your overall debt situation and improve your financial health, it sometimes may adversely affect your credit score.
But, if you choose the right plan and take care of a couple of things, payday loan debt consolidation can actually help you improve your credit worthiness. Following is a brief rundown on three most common types of consolidation methods and how your credit score is affected in each case.
Debt Consolidation Program
Companies that offer consolidation payday loans services offer a specific program that allows you to consolidate your multiple debt accounts into one, which means you end up making just one consolidated monthly payment to the company and the company then disburses the payments to your respective lenders. The consolidation company works as a mediator between you and your lenders. They charge a certain amount of fee for this service. They call it commission, which is a certain percentage of the total amount of debt that they help you save. When you use a consolidation program, your credit score is affected depending upon how the payments are being reported to the three major credit bureaus. Your credit score can remain unaffected if your lenders do not report the payments to the credit bureaus at all. This is possible because payday loan lenders work differently from the conventional lenders. Since the payday loan laws in almost every state of the United States of America are getting stricter and stricter, payday lenders prefer not to make things legally complex for them by reporting the payment or nonpayment to the major credit bureaus. They often report the payments to small credit agencies, which does not make any big difference in your credit situation because your actual credit score is determined by the information provided by the three major credit bureaus, which are Experian, Equifax, and TransUnion.
Debt consolidation loan is one of the most common methods of consolidation payday loans. In this method, you borrow a new loan, a big amount, and then pay off all your outstanding payday debt balances using the proceeds thus received. This way, you end up having just one loan account that allows you to make the repayment in small monthly installments over a specific period of time as agreed. In this case, the payday loan debt consolidation company does not work as a mediator. Instead, they become your lender. This consolidation loan is treated as a conventional loan program and so it is very much likely that the lender, which is the debt consolidation company in this case, will report the payments to the three major credit bureaus. If you are making the payments in a timely manner, you will see a significant increase in your credit score within just a few months. On the other hand, if you are again missing your payments on the consolidation loan, it will damage your credit report. Just make sure that when you sign up for a debt consolidation loan to payoff your payday loans, you must ask the consolidation company to agree to report the loan as a simple conventional loan to the credit bureaus. If the company reports the loan as a consolidation loan, it will have negative impact on your credit report. It gives the message to the credit bureaus that you have not been financially very responsible in repayment of your previous loans and that is the reason why you are now signing up for a consolidation loan. Besides that, the consolidation company must also agree to report the payments as “paid in full”, not as “paid in settlement” or “paid as per a consolidation program”.
Overall, as we can see, though consolidation payday loans can be a great financial tool to get rid of your mounting payday debts, it can also have significant impact on your credit situation. Whether this impact is positive or negative depends on how the programs and the payments you thus made are reported to the three major credit bureaus. Therefore, if you are considering using these programs, you must work on a proper planning.