Can debt consolidation affect my credit rating?

A large number of American consumers consolidate their debt to end their financial problems. Their decisions are quite justified because consolidating debt can be a very useful solution for people who have too much credit card debt. You can stretch your repayment period and have a low rate of interest if you consolidate your debt. Nonetheless, a lot of consumers are very concerned about the effect of debt consolidation on their credit report. Many people believe that debt consolidation lowers your credit rating and others believe the contrary. How does debt consolidation affect your credit score? Let's try to find out.

How does debt consolidation work?

To consolidate your debt, you would need to take a big loan from a bank and clear all your credit card debts with it. The consolidation loan must be a long term, low interest loan. If you consolidate your debts for a long period, your monthly installments will become lower. Moreover, secured consolidation loans have a low interest rate.

Can debt consolidation harm your credit score?

Debt consolidation does not lower your credit score directly. Your credit score is lowered only when you make a "less than full" payment. When you consolidate your debt , you pay back the full debt to the creditor. Unlike bankruptcy and debt settlement, there is no question of any debt reduction. So debt consolidation won't deliver a direct blow to your credit score.

However, it must be said that debt consolidation can indirectly hurt your credit. When you are consolidating your debts, you are defaulting on your original repayment plan. This will be certainly reported to the credit bureaus by your lenders. Therefore, your credit report will have a negative remark. This will bring down your credit score to an extent. But the damage will be minor, and it is certainly possible to rebuild your credit.

In an indirect way, debt consolidation can help you to improve your credit score. This is because debt consolidation requires you to make on time payments for a long period of time. During the process, your credit score improves significantly. Of course, this can backfire if you start missing payments.

You will feel the effect of bankruptcy and debt settlement on your credit even after 7 years. But debt consolidation is one of the better debt relief programs. It does not hurt your credit score in a significant manner. Therefore, consolidating your debt will not harm your credit worthiness.

Author Bio:

The article is contributed by BG, who is an IAPDA arbitrator associated with Oak View Law Group. Through this article, he offers his suggestion on the fact that if opting for debt consolidation can hamper your credit report.