Debt Consolidation and Credit Score

The financial world is an interesting place because just about everything is related in some way. Every single thing that you can do in your financial life is recorded somewhere and one of the best places to look for that sort of history is your credit report. With that in mind, you have to consider how your debt relief actions will impact your credit score. For the most part, people with a need for debt consolidation will probably have a lower credit score than they want. That is because a large amount of revolving debt and a lot of open accounts will bring down your score quickly. So how does debt consolidation interact with credit scores?

The first mistake many people make is assuming that resolving their financial obligations will be easy. Some companies promise quick loans to any consumer who needs them. These loans are legitimate, but they come at a higher price than some consumers may realize. Customers who are looking for a debt-consolidation loan often have poor credit due to failure to meet their financial obligations. Therefore, lenders often charge higher interest rates to these consumers than they would to consumers with higher credit ratings. Furthermore, if the consumer defaults on this loan, it can negatively affect her credit even further.

Taking up debt consolidation is basically pulling all your loans together and taking a loan to pay off the lump sum bit by bit each month. In general, it should not affect your credit score in any major way at all. But with the way some may deal with their current financial situations, it could be damaged. First you need to know how your score is evaluated.

A common mistake people commit when they are trying to increase their credit score is to close several of their operating credit cards. Availing credit on credit cards can be a double-edged sword. Canceling them signals that your one-time potential to raise credit with a demonstrated ability to pay off now stands damaged. So rather than canceling out your credit cards, use their existence to show that you still are seen as credit-worthy by credit givers. Here again, debt consolidation is almost your only way out to help retain them and yet not fall behind on payments as that would damage your credit score. Just be cautious that you never miss payments on a debt consolidation plan as this will undo the entire repair to your credit again.

When you take out a debt consolidation loan, it is imperative that you keep up with payments if you do not want the loan to negatively impact your credit rating. Do not lose track of deadlines and you will effectively protect your credit. If you fail to make payments, the penalty could be having a report filed against you, which would certainly bring your credit score down. Clearly, you are in debt because your spending habits could use a facelift. Make a change immediately after obtaining a debt consolidation loan to prevent your financial situation from worsening.

In many cases, the debt consolidation agency will extend you favorable terms, or length of the loan. This means that you pay less every month than you did paying several bills. This means more money in your pocket every month. You can use this money to save, or to pay off your loan faster. This also helps your credit, the more credit lines that you show to successfully pay off, the better off your credit score.

Some components of shorter loans could actually affect your credit negatively. One situation is whereby the loans that are negotiated by the debt consolidation experts are reflected as ‘defaulted’ or ‘settled’ on your credit report. Though this may act as a blow to you, the effects are only for a limited period; normally not beyond six years. Put simply the loans that you get in the short term will definitely have a higher interest rate but they will be beneficial in the long run in helping you to reduce your debt.

It is accurate that a credit rating will be affected by a settlement. The impact will be negative and the credit score will be temporally lowered. Now, this is a very key point. There is a huge difference between a temporary hit to a credit score vs. complete and total ruination. Again, ruination infers permanence. A temporary lowering of a credit score is exactly that – temporary. The score can (and usually is) rehabilitated over time.

Consolidation will not hurt your credit score as long as you make on time payments each month to the consolidation company. You will also need to prevent any chance of debt while and after your consolidation plan to keep yourself financially stable thereafter. Consolidation can actually repair your credit by reporting to credit scoring companies of your successful timely payments, and clearing of debt.

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