Will Debt Consolidation Affect Your Credit Score?
Debt Consolidation has received a bad reputation from some. Some people will tell you it is no different than filing bankruptcy. If you want to reduce your debt to income ratio and lower monthly payments considering debt consolidation may be scary with this information out there.
Debt Consolidation does not have the same impact as filing bankruptcy. Debt consolidation can actually be helpful for reducing or eliminating your debts. Debt consolidation primarily is used to pay back all or a portion of your debts and bankruptcy normally means you do not pay back any of your debts.
Depending on what type of debt consolidation you choose to do it will affect your credit score differently.
The Debt Management programs are for those who wish to eliminate their excess debt. The account agent will work with your creditors to agree to payment in full by accepting a smaller amount than is actually owed to them. Although this method is common for those who fall behind on their payments and are being hit with large late fees or penalties; It can have a very negative effect on your credit score.
A debt consolidation loan is used to pay back your debt and have only one payment. This loan will be large enough to pay your balances to your creditors in full and remain in good standing. This reflects well on your credit report and should have no negative impact on your credit score.
Your credit history length makes up a portion of your total credit score. It may be a small percentage but those few points are important when trying to get a good interest rate on a loan. Keep in mind if you plan on paying creditors in full and closing the accounts the credit history length may be shortened by doing so. The older the accounts are the larger the impact they can have. It is best to leave older accounts open even after they are paid in full.
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.
Keep in mind that if you pay a creditor a settled amount that is lower than the amount owed you will create a negative drop for your score. When you are paying the creditor the full amount owed it will result in a positive impact on your credit score.
You should ensure your debt to income ratio is low enough to afford another loan payment prior to applying for any loan. Make sure you have no late payments for at least 3 months before you apply. The oldest accounts should remain open to keep your credit history length from being shortened.
Debt consolidation is an excellent way to eliminate high interest debt when used correctly. But anytime you default on any part of your debt your credit score will drop considerably.