When consolidation helps your credit and when it hurts.
The short answer: It depends.
In some cases, debt consolidation can help your credit score. But in other cases, it can hurt your score. It can also depend on which option you use for consolidation, since there’s more than one way to consolidate your debt.
When debt consolidation helps your score
For the most part, if you use the right option for debt consolidation for your circumstances, it shouldn’t hurt your credit score. In fact, most times your score will improve.
When you consolidate debt, you have a payment plan that you’re supposed to follow. If you follow that plan correctly, this means you’re making payments on time and taking steps to cut your debt load. Those are the two biggest factors in determining your credit score. So many times, your score goes up as your debt goes down.
Fact: Even with an assisted debt management program through credit counseling, your credit score may improve.
When debt consolidation hurts your score
Debt consolidation usually only hurts your credit score when you don’t do it right or don’t use the right solution – that includes a debt management program!
So how and when does that happen?
When you start a debt management program, you’re adjusting the payment schedule for your credit cards. So it’s important to note that your creditors may report that you’ve missed a payment on your credit reports in the first month your plan starts. Basically, this happens because there can be a gap between when a payment was supposed to be made on your previous payment schedule and the payments you’re making now.
This only happens in the first month of the program. After that, your payments are made on time according to the new schedule. As a result, most people see their scores improve because they have low credit scores starting out. That one month of “missed” payments is usually a drop in the bucket compared to all the other payments that might have been late or missed while you were struggling.
Of course, if you have really excellent credit, then a few missed payments in the first month of your debt management program CAN make a difference and lower your scores. But really, if your credit is that high you’d be better off consolidating on your own with a debt consolidation loan or credit card balance transfer.
Can a balance transfer or consolidation loan hurt my score?
If you don’t pay the debt off responsibly, yes. Any time you miss a payment, you hurt your credit score. So if you consolidate your debt by transferring credit card balances or by taking out a personal unsecured consolidation loan, you shouldn’t have any credit damage unless you miss a payment.
Unfortunately, some people get into bigger trouble with debt after they consolidate. Why? Because once the debt is consolidated, you’ll have zero balances on all of your credit cards. It can be really tempting to start going out and spending before you pay off the consolidated debt. This is just making your debt problems worse.
Always finish paying off consolidated debt before you start charging again. Otherwise, you can have a real mess on your hands and can ruin your credit in the process.