Does Debt Consolidation Hurt Credit Rating?

Many people ask, does debt consolidation hurt credit rating? The answer to this question is more in-depth than just a simple yes or no. There are different means of consolidation. In some cases, you may work with a credit counseling agency or on your own to negotiate lower fees and smaller payments. These companies usually lump all your debt into one sum, and give you a monthly payment amount which you pay to them. In turn, they pay each creditor a portion of the money you gave them. When one is paid off, they add the additional funds to a second creditor’s bill and so on. This is a good tactic if you have lots of credit card debt and are having serious trouble making your payments.

However, this strategy may lower your credit for the time being. At this point, you should not even consider using credit because you want to pay off all your outstanding debts first before establishing new accounts. After your creditors are paid off, your score will improve. Then you will be able to slowly build a higher score by taking on small lines of credit and paying them off on time. So, while this type of consolidation may hurt you credit rating at first, it can raise it in the long run. It is definitely something to consider if you find yourself swamped with unpaid bills each month and especially if creditors or worse, collection agencies, are starting to call.

College students and graduates of college often consolidate their student loans to make payments more convenient and manageable. Many students have numerous loan payments to make each month, and they find consolidation not only lowers the full amount paid each month but also gives them the convenience of only having to keep track of and send off one payment per month. It should be noted that the federal government only allows one consolidation per student, so it is important to choose the right time before making this decision.

In any case, debt consolidation can be helpful for your credit rating because you will be able to make your payments. By being late or missing payments, you are hurting your credit score and consolidation is designed to prevent this. You don’t have to keep track of numerous bills each month, you only need to make one payment to the credit management company you are using. It may take some time to rebuild your credit, but by paying off your creditors then slowly building new lines of credit, you can raise your score. It takes time and diligence but it can definitely be accomplished.

Debt consolidation is not for everyone. If you are in such financial hardship that you cannot make your payments at all, then bankruptcy may be the best option for you. However, if reduced payments were something you could handle financially, then consolidation would be the better choice. Debt consolidation is also good for those with so many bills they have trouble keeping track of them and getting payments in on time each month.

If you have questions about debt consolidation, contact a consumer credit counseling agency. These are non-profit agencies; if there is not one in your area you may want to look for a consolidation company that charges a small fee for their services. Just make sure to check them with the Better Business Bureau to ensure they have no consumer complaints. A financial advisor can also look over your income and expenses and advise you of the best way to improve your credit. As previously mentioned, the Department of Education can consolidate student loans once for the loan holder.