Information On How Debt Consolidation Can Affect Your Credit Score
Tuesday, August 31st, 2010 Subscribe To Our Feed
Debt Consolidation is plagued with a poor rep. many believe it is no better than filing bankruptcy. With all this scary information surrounding debt consolidation it can make people leery.
The truth is that debt consolidation is not the same thing as filing bankruptcy. Debt consolidation proves you are taking steps to pay back your debts. Debt consolidation when you pay back 100% or a portion of your debt and bankruptcy usually results in you paying none of the debt.
Depending on what type of debt consolidation you choose to do it will affect your credit score differently.
There are Debt Management programs that advertise the ease of eliminating all your debt. The agents actually haggle with your creditors pushing them to agree to a lesser amount owed. This method may be popular for some who cannot afford their payments no longer and need help reducing or eliminating it, it will affect your credit score very negatively.
A debt consolidation loan is used to pay back your debt and have only one payment. This loan will be large enough to pay your balances to your creditors in full and remain in good standing. This reflects well on your credit report and should have no negative impact on your credit score.
Your credit history length makes up a portion of your total credit score. It may be a small percentage but those few points are important when trying to get a good interest rate on a loan. Keep in mind if you plan on paying creditors in full and closing the accounts the credit history length may be shortened by doing so. The older the accounts are the larger the impact they can have. It is best to leave older accounts open even after they are paid in full.
When you are shopping for a mortgage loan it is recommended to get your full credit report including your credit score. Watch your credit score to make sure there are no changes when you pay off debts. You want to apply for your loan after you increased your credit score to its fullest.
The things that will have the largest impact on your credit score are when pay a creditor any amount that is smaller than you owe, however when you pay the creditor the full amount that is owed your credit score will be affected in a positive way.
Your debt to income ratio should be low enough to show you can afford a new loan payment before you attempt applying for a loan. Before you apply you should also make sure that all your payments are current for at least 3 months. Keep those older accounts open if you are planning to pay them off so it will not shorten your credit history length.
Debt consolidation can be a wonderful method for eliminating high interest debts if used wisely. Any time debt consolidation is used to negotiate debts it is still considered a default on the loan and your credit score will always be affected poorly. If you have to use a debt consolidation program be sure that it is your only option, you may qualify for a debt consolidation loan instead.
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