How Debt Consolidation Affects Your Credit Score

When you are struggling to cope with your escalating debts which have overtaken the peace in your life, then the right choice would be to opt for debt consolidation. The process of debt consolidation replaces your multiple debts with a consolidated single debt. It helps you to lower, not only your interest rates, but also the payments made monthly against your debts. Also, the creditors will stop calling you frequently and harassing you, since they are now assured of getting at least a part of their dues.

Look for the signals
There are a myriad of indicators that show you that the time is ripe for opting for debt consolidation. There are still large amounts of bills to be paid even after exhausting the limits on your credit cards, or you are applying for new credit cards in order to pay off the balances on the existing ones, or you are obtaining loans against your pay packet so as to pay off debts incurred against purchases made in the previous months. All these highlight the inevitable need to consider debt consolidation.

Temporary effect
Enrollment in a debt management program will certainly affect your credit standing. But it will be for the present and once you have successfully cleared all your debts, you are back to square one. You may not enjoy an improvement in your credit rating immediately, but over a period of time your credit score is sure to rise. But on an overall viewing, debt consolidation looks much better than filing for bankruptcy on your credit score sheet. Whereas bankruptcy absolutely demolishes your credit standing, the process of debt consolidation can restructure your credit. By making timely and regular payments combined with no new debts, it will certainly help in improving your credit standing.

Lowering of interest rate
A significant advantage of a debt management program is that you will be eligible for a lower rate of interest which will automatically reduce the burden of monthly amounts to be paid. The monthly payment schedule will be manageable with your available financial resources. This will again help you in consolidating your credit because this credit score will improve as you pay regularly and your debts are reduced. Utmost care and restrain has to be exercised to ensure that you do not go on a shopping spree and accrue new debts.

Wrong notion
It is a gross misconception that a program of debt consolidation will destroy your credit standing and you will not be able to get a loan in the future. The factual working of the debt management process has a negligible effect on your credit score. There is a minute chance of your credit being eroded completely, but more chances of it being boosted due to a well monitored program of debt management. Because when you opt for a program of debt consolidation, it schedules a time frame for making your payments and when you strictly follow this roadmap you are sure to reduce your outstanding debts on a regular basis, which in turn will increase your consumer credits.

Single monthly check
The process of debt consolidation allows you to write one single monthly check for your payments. Since your creditors get their payments on time as scheduled through the consolidation agency, they are satisfied and happy. This program may continue for a period of years and a note stating that you are a part of a debt consolidation program may have been included in your credit score. But this will not affect your present credit standing.

Caveat
But the caveat has to be strictly borne in mind that you should not do anything that will incur new debts, for then your outgoings will increase due to the additional financial burden of making payments against the new debts. And if you again fail to fulfil your commitment, then your credit score may be affected adversely. There may also be a stipulation to this effect in your contract with the debt consolidation agency which may prohibit you from obtaining fresh credits.

Prevent new credit
In the present times when you are involved in a debt consolidation program it may be difficult to obtain additional credit. There are many creditors who are averse to providing credit to individuals who have opted for a debt management program. For some creditors your credit score is more significant than your credit report and they may overlook the notation and still offer you new credit. But it is in your best interest not to travel down the dangerous road again. So, refrain from indulging in any activity, which will put you in new debt and ruin your path to a successful completion of the debt consolidation process.

Harmful incidents
That you have opted for a debt consolidation program by itself may not hurt your credit score, but there are some occurrences which may hurt your credit score. Once you have consolidated your debts, it is the responsibility of the consolidation agency to pay your creditors. Therefore, you need to choose a reputed and creditable debt consolidation agency that is sure to make the monthly payments on time to your creditors. If the agency fails to make these payments on time it may lead to an additional nuisance of new notations on your record regarding late payments, which may harm your credit score.

Selection of agency
Another stipulation, which some debt consolidation agencies insist upon from their clients, is for these clients to cancel all relevant credit cards that are to be included in the debt consolidation process. In the opinion of the agency, this act will prevent you from giving into the temptation to spend unnecessarily. But it has a harmful effect on your credit score because the cancellation of your credit cards means a reduction of the available credit to you, which in turn results in a high credit utilization ratio.

The net result is that this high credit utilization ratio makes it look like you have reached the maximum credit limit and creditors will hesitate to offer you new credit because of this. Therefore, it may be highly advantageous for you to deal with a debt consolidation agency that does not require you to cancel your credit cards.