Will Debt Consolidation Damage My Credit Score?
Does consolidating your debt negatively affect your credit score? It depends on several factors.
Debt consolidation can both benefit and increase your credit score. However, it can also damage your score. Which consolidation option you choose is also a factor, as there are multiple ways to consolidate your outstanding debt.
When Debt Consolidation Helps Your Credit Score
Typically, if you attain the right information and chose the best consolidation option for your financial situation, your credit score shouldn’t be affected negatively. In fact, your score should increase (interested in more information about credit scores? Click here).
When consolidating your debt, your credit score should increase. This is because of the organized program you’ll be given. When consolidating your debts, you’re required to follow a specific payment plan, which includes the time and amount of each payment. If you follow the plan properly, payments should be made on time and you’ll see your debts slowly decreasing. Thus, when calculating your credit score, these two positive factors should increase your score significantly.
When Debt Consolidation Damages Your Credit Score
If you fail to follow this detailed plan correctly, if you’re late on making payments or don’t pay the minimum amount owed, your credit score will suffer. Your score may also decrease if you haven’t chosen the right consolidation program to suit your lifestyle. That includes a debt management program.
Learn how to qualify for a debt management program here.
When and How Does This Occur?
Starting a debt management program means you’ll be modifying your payment schedule for your credit cards. Thus, it’s crucial to know that during the first month of your program, your creditors may mention in your credit report that you’ve missed a payment. This can arise when there’s a time gap between when a payment was intended to be made on your prior payment schedule, and the payments you’re currently making as part of your debt management program.
Nevertheless, this only appears in the first month, when the plan is implemented. Otherwise, payments should be made on time, adhering to the new schedule. As they had low credit scores, to begin with, most individuals will see their scores grow. So, the first month’s worth of “missed” payments is, in reality, very minimal compared to all the payments you would have missed, or been late on while you were struggling to pay off your debt.
Then again, if you have an exceptional credit score, one or more missed payments during the first month of your program can decrease your score. If your credit is good, to begin with, a better option for you would be to consolidate your debt on your own, by acquiring a debt consolidation loan or credit card balance transfer.
Creating a Budget That Works For You and Your Lifestyle, read here.
Can a Balance Transfer or Consolidation Loan Damage My Score?
If you fail to make monthly payments, then yes, your credit score can be damaged. Whenever you miss a payment, don’t pay the minimum amount, or forget to pay altogether, you damage your credit score. Therefore, if you obtain debt consolidation by moving your credit card balances or using an unsecured personal consolidation loan, your credit score should not be affected negatively, unless there were missed payments involved.
Sadly, some individuals acquire even bigger debt problems after consolidating. With a zero balance on their credit cards after consolidation, many people give into temptation and end up spending what they simply don’t have. This creates a more expensive, drawn out issue.
It’s important to eliminate all of your consolidated debt before spending money on your credit cards again. If not, your financial situation could get out of control and will have a strong negative impact on your current credit score.