Debt Consolidation Effect on Credit Score

Many consumers are finally beginning to realize how important it is to maintain a strong credit rating and this task can be virtually impossible when struggling with too many financial obligations. As individuals look for various ways to deal with their own unique situations, one of the most common concerns is that debt consolidation may adversely affect the person’s credit rating. It is necessary to truly understand what such a process will actually do before deciding to pursue other options.

For the most part these services do not do any damage to your credit score.. These loans pay off your outstanding debts are paid off. There is usually nothing reported against your credit. It may actually help your credit in some cases because now that you only have one payment to make each month (to the consolidation) your credit will improve because you are more apt to make that one payment on time. If your keep the credit card accounts you use the consolidation to payoff open your credit score will also improve because it will show you have more available credit, which creditors like to see. Just do not fall back into the same old rut and start using those cards again or you will end up in a worse situation than the one that you just got out of.

Now, if the debt consolidation plan your seek also includes negotiating down your debt with the promise of a lump sum payment, you will find your credit rating will decline. Now, some may wonder why you are penalized for trying to get yourself out debt. The answer is you have borrowed more than you can pay back and have, essentially, defaulted on part of your payments. This will be reflected on your credit score. However, this will only be a temporary issue. Remember, a poor credit score can be boosted and improved.

Don’t ever assume anything, vigilance and perseverance wins the day.

FICO scores are based upon a number of criteria. Essentially your score is based upon the amount of debt available on each account versus how much debt you have leveraged on each card. The less available credit on each card indicates you’ve maxed out your card, thereby lowering your score. Most credit card companies require a minimum payment of five percent of each account balance, every month. Regardless of the balance on any account, you must pay a minimum dollar amount on each account, and that may result in paying $50 on six credit cards with balances around $800. That’s a payment of $300 each month, it adds up. Consider the same outstanding balance (six times $800 or $4,800) with a payment of $240 freeing up $60.

Will the credit card companies actually let you pay off your balances all at once without hurting your credit score?

The answer is yes and no. Yes, you will be able to pay off the balances completely with a consolidation loan. This will show up on your credit report since the reduction of debt on your credit report will increase the amount of available credit. You will be done dealing with your credit card companies after this is done.

The tricky part comes from how the new loan is manifested in your credit report. There is a possibility that for a short time, your credit report may show that you have no available free credit because of your past debts, and that at the same time you took out a new loan, which further decreases your available credit into negative territory.

Tips To Increase Your Credit Rating

Use debt consolidation to pay off dues.
Get your debt balance above your credit limit.
Lower your debt to income ratio.
Do not make too many requests for loans if you have a low credit score.
Do not run up new debts after refinancing old loans.
Do not pay bills late or forget to pay them.

Debt consolidation and credit rating are connected, so always look for debt consolidation companies within a 30 day period or your score may decrease. Once you go in for debt consolidation to repay credit card debts, stop using these credit cards. However, don’t close them as this would worsen your credit score.

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