How Will Debt Consolidation Affect My Credit Score?
One of the most common misconceptions consumers harbor about debt consolidation is that it will ravage their credit ratings and leave them unable to qualify for loans ever again. In reality, the negative effect that debt management plans have on credit scores is usually negligible. In many cases, consumers' credit scores will not drop at all and may even rise as a result of credit consolidation. Debt consolidation programs help their clients pay their bills on time and pay down their account balances quickly, both of which will result in credit rating improvements. Read on for an in-depth discussion of how debt consolidation will affect your credit score.
The Truth
After you get your debt consolidated, you will write one check every month to your debt consolidation program. The consolidation service then pays your creditors for you, so your bills are always paid on time as long as you pay your consolidation agency. Most debt management plans last for several years. During this time, a note will appear on your credit report indicating that you're repaying the debt through a consolidation plan. This notation will remain on your report until you pay the account in full, but it should not harm your credit score in the meantime.
Applying for New Credit
Even though your debt reduction efforts are unlikely to harm your credit score, you may have difficulty qualifying for new credit while you are participating in debt consolidation. For one, many debt consolidation services prohibit their clients from applying for additional credit while enrolled. Additionally, some creditors frown up on a notation on your credit report indicating involvement with debt consolidation solutions, and thus will not issue new credit. However, most creditors are more concerned with your credit score than your credit report, and creditors that use the scoring model are much less likely to penalize you for participating in online debt consolidation.
What Will Hurt Your Score
Although it is unlikely that a debt reduction plan will hurt your credit score, it is not impossible. There are some things that will damage your credit rating if they occur during the course of your debt consolidation program. Here are the two things that can hurt your credit score the most when you consolidate debt:
- Late payments. After you consolidate, the job of paying your creditors will be in the hands of your debt consolidation service. It's imperative that you choose a consolidation company that you can trust to pay your creditors on time every month. Otherwise, you'll rack up late payment notations on your credit report, which will cause your credit score to drop.
- Closing accounts. Certain consumer debt relief programs require clients to close all of the accounts included in the consolidation. In other words, you will have to cancel all of the credit cards you wish to consolidate. Although this will help reduce the temptation to spend, it will also have a negative impact on your credit score. Closing accounts reduces the amount of total credit you have available, which in turn raises your credit utilization ratio. A higher utilization ratio makes you look maxed out to creditors and lowers your credit score. If possible, try to find a debt consolidation service that does not require you to close your accounts.
