Will Debt Consolidation Affect Your Credit Score?

A bad reputation swarms around debt consolidation. Some think it is just as bad as filing bankruptcy. Hearing the poor information on debt consolidation can scare many people away from it.

The truth is that debt consolidation is not the same thing as filing bankruptcy. Debt consolidation proves you are taking steps to pay back your debts. Debt consolidation when you pay back 100% or a portion of your debt and bankruptcy usually results in you paying none of the debt.

Depending on what type of debt consolidation you choose to do it will affect your credit score differently.

Debt Management programs are available to help eliminate your debt but there is a catch. The account reps will contact your creditors and negotiate with them to accept a lower amount than you owe as a payment in full. This program is the most common for people who no longer can afford their payments and are getting slammed with late fees and penalties. This type of debt consolidation is most likely where the poor reputation came from as it does affect your credit score very negatively.

A debt consolidation loan is the better way to go; you can reduce or eliminate high interest debts. The loan is made to pay off your debts in full and you will not default with your creditors in any way. There will be no negative impact on your credit score using this type of debt consolidation.

Credit history length is measured for part of your credit score. When trying to get a good interest rate on a loan every small point counts. When paying creditors in full and closing accounts your credit history length will be shortened. Older accounts have a more dramatic effect. Even if you pay an account off, leave it open, especially the older ones.

When you are shopping for a mortgage loan it is recommended to get your full credit report including your credit score. Watch your credit score to make sure there are no changes when you pay off debts. You want to apply for your loan after you increased your credit score to its fullest.

When paying a creditor any amount that is lower than what was owed will result in a lowered credit score. When you pay the creditor 100% of the debt amount that is owed your credit score will be raised.

Debt to income ratio should be considered before you apply for a new loan. Make certain you have paid all accounts on time for at least three months. Allow older accounts to remain open even after you paid them in full to not decrease your credit history length.

Debt consolidation can be a wonderful method for eliminating high interest debts if used wisely. Any time debt consolidation is used to negotiate debts it is still considered a default on the loan and your credit score will always be affected poorly. If you have to use a debt consolidation program be sure that it is your only option, you may qualify for a debt consolidation loan instead.