Debt consolidation is plagued with a poor rep. many believe it is no better than filing bankruptcy. With all this scary information surrounding debt consolidation it can make people leery.
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.
The different types of debt consolidation will each have a different impact on your credit score.
There are Debt Management programs that advertise the ease of eliminating all your debt. The agents actually haggle with your creditors pushing them to agree to a lesser amount owed. This method may be popular for some who cannot afford their payments no longer and need help reducing or eliminating it, it will affect your credit score very negatively.
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.
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.
If you are planning on applying for a mortgage loan or any type loan you should obtain your full credit report that includes your credit score. Keep a close eye on your credit score for any effects each time you pay a creditor in full. Applying for the loan while your credit score is the highest will result in the best possible interest rate.
The things that will have the largest impact on your credit score are when pay a creditor any amount that is smaller than you owe, however when you pay the creditor the full amount that is owed your credit score will be affected in a positive way.
Your debt to income ratio should be low enough to show you can afford a new loan payment before you attempt applying for a loan. Before you apply you should also make sure that all your payments are current for at least 3 months. Keep those older accounts open if you are planning to pay them off so it will not shorten your credit history length.
Debt consolidation when used properly is an excellent way to eliminate high interest debt. But if you are trying to default on your debt or any portion of it you should expect your credit score to decrease.
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