Will Debt Consolidation Affect Your Score in Any Way?

When it comes to falling off the financial tracks, there is no doubt that almost half of today’s population have either experienced it or are experiencing it at the moment. Debts are hard to deal with but have become so common that it’s no longer surprising. To help ease off the burden of debts, you could always opt to consolidate them and slowly pull yourself back together again. But the question that often surfaces is this; would this step affect your credit score?

First, you need to understand consolidation. There are actually two kinds of debt which are secured and unsecured, the difference being that secured has collateral while the latter doesn’t. By consolidating your debts, what you’re actually doing is pulling all your amounts together forming one lump sum which you can slowly pay off making the debt elimination process faster.

In today’s upcoming industries, there are many debt consolidation companies that are available, offering you advice and packages with great deals and attractive outcomes. What they fail to mention is how your credit score may be affected.

Your credit score is a figure which expresses the creditworthiness of an individual or the chances of the person making frequent and constant payments. The credit score percentage is broken down to 5 parts which is:

Payment History (35%)

Total Outstanding Balance (30%)

Age of Credit History (15%)

Types of Credit Used (10%)

Applications/Inquiries for New Credit (10%)

Truth be told, by taking the action of consolidating your debts, you are actually putting your credit score at risk.

There are several explanations as to how and why:

In order to consolidate debts, a new account need to be created, that would lower the average age of your credit history.
Since a new account would be required, always remember to write a letter to the bank requesting that your previous account be closed. If not, it would be reported as your account was closed by your creditors and this would definitely affect your credit score negatively.
When applying for a loan, it is important that your credit score is checked and reviewed to make sure that you’re a reliable client. Each time your sheet is reviewed, it would be reported as an inquiry and too many inquiries would be assumed that you are taking lots of loans which you are unable to payback. This too will ruin your credit score.
As debt consolidators fight and negotiate for lower interest rates, the time period would be dragged on before payment is made. This may result in paying after the due date that would cost you to pay late fees and penalties. Also, always check that your consolidator is making monthly payments on time so you don’t get charged the excess fee.

However, if you manage to stick to the payment schedule and discipline yourself to change your spending habits, you can actually consolidate your debts without ruining your score in a long run. Pick a good and well known company and you’d have your financial worries under control.

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