Debt Consolidation and Your Credit

The right solution should only mean good things for your score.

The credit effects of debt consolidation can be beneficial

In the right circumstances, debt consolidation helps you rein in out-of-control debt payments when things like credit card debt start to take up too much income and throw your budget out of balance. You get lower payments with less added interest, so you can get out of debt as quickly and affordably as possible. But what will consolidation do to your credit?

The information below can help you understand what kind of impact debt consolidation can have on your credit profile and credit score. If you still have questions or need help exploring your options for consolidation, call us at or complete a request for a Free Debt Analysis to request help online.

In most cases, consolidation is good for your credit

There are several different ways you can consolidate debt, depending on your particular financial circumstances. You can use do-it-yourself debt consolidation methods or you can get assisted consolidation with a debt management program through a credit counseling agency if you don’t have credit good enough to do DIY.

The good side of consolidation

But no matter which option you choose, as long as it’s the right option to fit your needs and financial situation, then the overall impact of debt consolidation on your credit should be positive.

In most cases, the consolidation will not even appear on your credit profile, because for all intents and purposes you’re paying your debt off on a schedule you and your creditor agree to follow. The only reason you get a negative remark on your credit report is if you do something like miss a payment or default on a debt. With consolidation, you’re still paying your debt off –you’re just doing it in a way that’s more manageable for your budget.

So unless you choose an option that’s not right for your situation, there’s nothing negative that would appear on your credit report. What’s more, at the same time, consolidation allows you to pay off your debt quickly so if everything goes right, the completion of your consolidated debt payoff should end with your credit score in a better place than when you started.

It works like this. Credit utilization ratio is a key determining factor in calculating your credit score. It’s actually one third of the weight of your score calculation. When you reduce debt, you restore your credit utilization ratio to where it needs to be. At the same time, the payments you make on the consolidated debt are positive remarks on your credit report because it builds a positive credit history for you (which is 35% of your credit score calculation).

So debt consolidation when done correctly and followed consistently should have a positive affect on your credit, rather than anything negative. That’s why it’s a good option to use if you’re on the verge of distress, because you avoid more credit-damaging options like debt settlement or bankruptcy.

When consolidation can hurt your credit

The downsides of consolidation

That doesn’t mean that’s there is absolutely no way to damage your credit after you consolidate your debt. Very simply, if you don’t stick to your plan to full completion, then you can potentially damage your credit.

Let’s say for instance, that you use a DIY option like a personal debt consolidation loan to consolidate your debt. You use the money you receive from the loan to pay off all of your credit cards and other unsecured debts. That’s good for your credit.

But then you lose your job and can’t pay off the consolidation loan. You start to miss payments. In this case, those missed payments will become negative remarks on your credit report and could potentially decrease your score.

The same thing can happen with a debt management program. If you don’t communicate with your credit counselor effectively and make arrangements if you think you won’t be able to make a payment, then you may get dropped from the program and face all of the penalties and damage you were about to avoid by consolidating. This can be avoided with consistent and clear communication, even if you start to have problems.

To learn more about the three ways debt consolidation can hurt your credit score if it’s not done correctly, read more about how debt consolidation can potentially affect your credit score.