Yes, Debt Consolidation Will Affect Your Credit Score

It used to be that debt was a hush-hush subject that no one liked to talk about aloud. However, in light of the recent economic instability and the surge of consumers losing their jobs, homes, and life savings, it’s no longer a taboo subject. Debt is discussed and is a much sought-after subject and affects many more people than we might have even realized. It is no wonder that more and more individuals are now seeking the help of a credit counselor or debt consolidation company to help them dig out from under weighty financial problems.

Debt Consolidation is An Option
Debt consolidation is a popular option for consumers to lower the total amount owed, making debt issues become resolved faster and more efficiently than if no debt options were used at all. Debt consolidation involves the individual or a third party negotiating with creditors to eliminate penalties, lower interest rates, and negotiate a lowered monthly payment for all debts the consumer incurred. At the end of the consolidation term, you are essentially free and clear of your debts that were consolidated. Most creditors will agree to such negotiations in an effort to avoid you filing for bankruptcy, which in turn would net the creditor nothing.  However, while resolution of the debt is good for you and your finances, it may not always be kind to your credit.

What Happens to Credit Scores Immediately?
Unfortunately the debt negotiation process is not one that will be over and done with in a single day. While your debt is negotiated, your open balances are still required to be paid. If you can not afford the monthly payments, creditors may begin suspending or closing your accounts. If you are late on payments or miss them entirely, your credit score will take another hit. This may continue to happen for the first few months until your account can be reported as being back on track once you have paid regularly for a few months through the consolidation program. Additionally, the closed accounts will alter your debt to credit ratio which can also have a negative influence on your loan.

What Happens To Credit Scores In the Future?
Since the process of debt consolidation negotiation can take months to complete, your credit will suffer for a bit during the down time. Once the process is well under way and you are making regular payments as per your agreement, you may start seeing an increase in your credit score, proof that your accounts are back on track. As you continue to have good payment history information reported back to the credit bureaus, your credit will continue to improve. If you learned a lesson and adopt better money management habits after you’ve considerably reduced your debts, you can continue to up your credit score and eliminate other debts on your own.