How Debt Consolidation Affects Your Credit Report?

Millions of Americans are submerged in the pool of debt and they are always looking for a solution to come out of it. Once they liberate themselves from the clutches of debt their financial health improves. In order to eliminate their debt they employ many management programs. But their main area of concern remains whether the credit score gets affected by the debt management program or not.This article would discuss whether there is any chance for the credit score getting affected if the consumer goes for a debt consolidation program.

Can Debt Consolidation Affect the Credit Score?

One of the most common myths that hover in the mind of the consumers about debt consolidation is that it hampers the credit ratings. And once your credit record is damaged it is difficult to qualify for a second loan. But in reality there is an insignificant effect of the debt management plans on credit scores. There are many instances where consumers’ credit score has not fallen instead has risen as a result of credit consolidation. If you are paying your bills on time and repay your account balance rapidly then there’s a scope to improve your credit report. This is done efficiently by the debt consolidation program as they help their client in their repayment plan.

What is the Reality After You Get Your Debt Consolidated?

If you enroll for a debt consolidation program the debt is managed by a third party. You have to write a check every month to your debt consolidation company and they would disburse the amount to your creditors. In this way the bills are always paid on time as long as you pay regularly to your consolidation agency. Usually the debt management plan last for several years. In the mean time your credit report would indicate that you are on the process of repaying the debt through a consolidation plan. Until you pay the account in full your credit report would display this note but it might not harm your credit score in this process.

A consolidation program negotiates on the interest rate with the creditor. They make the payment plan affordable for the consumers so that they can pay back the amount they owe. The fluctuating interest rates are fixed between 0-10 percent by the consolidation program. This makes the payment plan reasonable for the clients.

Can You Apply for New Credit?

Your debt reduction effort might not have an ill effect on your credit report but it would be a hindrance in the path while applying for a new loan while you are consolidating your debts. There are many debt consolidation services that forbid their client from engaging into other loan programs while they are on the repayment plan. Many creditors won’t grant a loan application as your credit report would bear a remark indicating that you are on the course of repaying the debt through a consolidation plan. If the creditors find that your credit scores are less then they might penalize you for participating in online debt consolidation as they are more concerned with the score and not with the credit report.

In What Way the Score Can Get Affect?

It is possible to hurt your credit score while you are on the debt reduction plan. Late payment and closing of account can adversely affect the credit rating if they occur during the course of your debt consolidation program.

The two things that would hurt your credit score while you consolidate debt:

  • Late payments:
    The debt consolidation service takes the responsibility of paying off your creditor as you enroll for the program. But you have to make a right choice before enrolling for a debt consolidation program. And they should be loyal to pay to your creditor on time every month. If the payment is delayed then you’ll hold up late payment notice on your credit report that won’t allow your credit score to rise.
  • Closing accounts:
    Your credit score might be unfavorably affected if a debt relief program requests you to close all of the accounts incorporated in the consolidation. This might help to tame your temptation of over spending but it would hurt your credit score. Try to look for a debt consolidation service that does not require you to close your accounts.

Consolidating your debt won’t have a negative effect on your credit score. But make it a point to choose a reliable and responsible debt consolidation company. Ensure that it makes the payment to the creditor on time and does not force you to close the account.

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Comments

  1. Jenna says

    Seems like choosing to get help and start consolidating your loans is a good first step in get credit score fit and thus your credit score should be positively affected (even if it’s just a little bit) because of that.

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