Debt consolidation is one of the debt relief options that will not make your credit score suffer. In fact, as you continue to stick to the program, you will see that your score will continue to improve and reflect that you are now a more responsible credit holder.
Unlike the other debt relief options, you will still end up paying off the balance of your debt. Since there will be no reduction, your account will not be marked as “Settled” or worse, “Included in bankruptcy.”
Also, opting for debt settlement will require you to default on your payments. This is one way to really pull down your score. You need to allow it to happen so your creditors will be convinced that you have no money to pay your debts and the only solution, apart from bankruptcy, is to allow you to settle your debts. That means you will only pay off a portion of your balance and have the rest forgiven. Once completed, your score will be much lower than before and will be marked as “Settled” and not “Paid in full” – which is more preferable than the latter.
While debt settlement is effective when used under the right financial circumstances, it all depends on what you are willing to sacrifice. Bankruptcy is much worse because it gets your score even lower than settlement and that taint will stay on your record for the next 7-10 years.
Debt consolidation, at the very least, will indicate that you are current on your payments. If you apply the program at the right time, you may even avoid showing any late payments on your credit report. It will continue to reflect as “Current” which means you are still in debt but you are not missing out on payments.
Consolidating your debts allow you to make lower monthly payments to ensure that you can keep up with your contributions without putting too much restriction on your budget for basic necessities. In debt consolidation loans, you accomplish this by getting a loan with a lower interest than your current average. You then pay off the other debts, completing payments, without missing any due date. You will be left with this one bigger loan that you will pay off in the next 3 to 5 years. This could lower your score a little since your debt amount will increase. However, it will improve as you completely pay off your other debts and regularly pay back the loan.
In debt management, you will be assigned a credit counselor who will help create a debt management plan. The plan will show lower monthly contributions that are stretched over a longer payment term so you still end up paying for the whole balance of your debt. In most cases, this has hardly any effect on your score.
Some financial experts used to find credit score concern quite ridiculous. It is like taking care of your debt so that you are eligible to take in more loans. However, recent changes show that it has become a vital part in our society. There is more at stake when you do not take care of your credit history.
For instance, a good credit score will keep the interest rate on your mortgage loan low. In most cases, landlords also look at your credit history to see if you will be a responsible tenant. Even employers look at this figure to gauge how you will perform in the workplace.