How Consolidation Helps and Hurts Your Credit

Debt consolidation helps many people by reducing the number of debt payments that they have to keep track of every month. Consolidation makes it easier to pay off debt, can lower debt payments, and can help people get out of debt. Although debt consolidation can improve your finances, it also affects your credit. In many ways, debt consolidation can improve your credit, but debt consolidation can result in an initial drop. These are the ways that your credit score can be affected after debt consolidation.

Debt Consolidation is Another Loan

Debt consolidation is another loan, and will affect your credit score accordingly. When you take out any loan, your credit will usually drop initially. As you make on-time payments, your credit score should once again go up. Your credit score will not be penalized because you are taking out a debt consolidation loan, but any new loan that you take out will lower your credit score for a short time.

Debt Consolidation Allows Debt to be Paid Off

When you pay off a debt, your creditors will report your debt as paid to the credit bureau. Paying off a debt as agreed will help your credit score go up. However, if you settle a debt for less than you owe, it will cause your credit score to go down, so make sure that you pay off your debts as agreed.

Closed Credit Card Accounts Can Lower Your Score

After you take out a consolidation loan and pay off your credit cards, you might be tempted to close the accounts. You don't want to charge your credit cards back up, but closing your credit card accounts can cause your credit score to go down, especially if you have had your card for a long time or you have a lot of available credit. If you have several credit cards, you might want to close most of the accounts, but keep your oldest card and the one with the highest balance. Closing accounts can initially have a negative impact on your credit score, but it will eventually rebound.

On-Time Payments Improve Your Credit Score

A debt consolidation loan can help you simplify your debt payments, which can help you make on-time payments. Late payments can seriously put a dent in your credit score. If too many credit card payments are causing you to make late payments, a debt consolidation loan can help you make payments on time. Being able to make all your payments on time, if you previously made a few late payments, will have a positive effect on your credit report.