If creditors have been breathing down your neck, you have so many credit card bills that you can't keep track of them all, or you are having trouble making the minimum payments on all your monthly debts, you may be considering a debt consolidation loan. Because your credit score affects everything from what insurance rates you pay to whether you will get hired for certain jobs, you may be wondering about whether debt consolidation will affect your credit score or not. There are some positive aspects, as well as negative aspects, that a debt consolidation loan will have on your credit score. Before you take out a consolidation loan, weigh the pros and cons.
If the sheer number of debt payments that you have to make is difficult to keep track of, and you sometimes forget to pay a card or two, debt consolidation will reduce the number of debt payments that you have to make every month to one, which should make it easier to pay your debts on time. Similarly, if the minimum payments are increasingly becoming difficult to afford, and a lower payment will make it easier to pay your debts on time, debt consolidation can be helpful. Since part of your credit score is based on whether you make on-time payments, you should see your credit scores go up after a while. It is important, however, that you are extra careful to pay your debt consolidation loan on time every month.
When you take out a debt consolidation loan, it will affect your credit score like any other loan would. Initially, taking out a new loan could cause your credit score to drop slightly. However, by consistently making on-time payments, this drop will soon be overcome. Your credit score will not be penalized because you are taking out a "debt consolidation loan." Note that this is different than debt settlement or credit management. If you enter into a program that negotiates a lower payoff amount, that will negatively affect your credit score.
Once you take out a debt consolidation loan, it would be wise to stop using your credit cards. Credit card debt is what causes most people to need debt consolidation in the first place. However, calling up your credit card companies and cancelling your accounts could have a negative effect on your credit. Part of your credit score is affected by the length of your credit history, so you may wish to keep your oldest credit card. Another item that the credit reporting agencies factor in when determining your credit score is your credit utilization rate. If you have a lot of freed up credit on credit cards, you have a low utilization rate. You might want to keep your cards with the highest limits, but stop using them.