Good News and Bad NewsHaving too many credit card payments can cause a lot of stress. Keeping track of several credit cards can be difficult. Coming up with minimum payments when there isn't enough money to go around can be difficult as well. This can lead to late payments, which can hurt your credit. You may have thought about debt consolidation, but are worried about how it will look on your credit report. There is good news and bad news when it comes to how debt consolidation will affect your credit. Find out how your credit score will be impacted. The Good NewsDebt consolidation can do many good things to your credit. By eliminating all but one debt payment, you are less likely to make late payments. Late payments can have a dramatic impact on your credit score, especially when they are recent late payments. Debt consolidation loans are looked at by creditors like any other loan payment. In the past, credit reporting bureaus would lower your score when your loan was a "debt consolidation loan", but it doesn't any more. When debt consolidation results in responsible repayment, your score will improve over time. |
The Bad NewsWhen you take out a consolidation loan, you are taking on new debt. New debt can lower your credit score, at least temporarily. Once you pay off your old debts with your debt consolidation loan, and make payments on your consolidation loan for a few months, these negative effects will make less of an impact, and will even improve your credit as you make on-time payments. Debt consolidation can also lower your score if you cut up all of your credit cards. Since part of your credit score is based on the age of your credit history, if you cancel your oldest credit card, this can hurt your credit score. The solution to this is to keep your oldest card, but hide it in a drawer and forget about it. This will keep your credit history intact, and will also keep your credit utilization rate low. In ConclusionWhen you consolidate debt, you will probably see a temporary drop in your credit score, as you take on new debt. Over time, your credit score will probably go up again, especially if you are responsible with your consolidation loan and don't apply for new credit cards. If you are in the market for a new car loan or a mortgage, you may want to hold off on consolidating, or hold off on the car or house purchase. If you think you will be in the market for a new car or house next year, your credit should recover, and even improve, if you consolidate now. |
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