Does a Debt Consolidation Program Hurt or Help Your Credit?

If you're one of the hundreds of thousands of people facing financial trouble and thinking about using a debt consolidation program, you may be wondering what effect it will have on your credit. The truth is the answer depends on a number of factors, including how badly in debt you are and if you settle your debt for a lower sum. Consolidating your debt both hurts and helps your credit in a number of ways and varies by individual.

Starting with the potential negative impact consolidating debt can have on credit, consumers need to realize that debt consolidation companies often settle debt for a portion of the amount owed. This is a great thing for people that owe more money than they can afford to pay and can help get them out of debt for good. Unfortunately, this will have a negative effect on credit because settling debt will be reflected on your credit report. For this reason, it's very important for anyone thinking about consolidating to think about all aspects and whether or not they can afford to pay their debt on their own or if they need assistance.

Debt consolidation can also have a number of beneficial effects on your credit history. Consolidating lowers the amount of money you actually owe by settling, resulting in a better debt to income ratio. The debt-to-income ratio is one of the largest factors that goes into a credit score and the lower it is, the higher your credit. Another thing that consolidating does is lowers the total number of creditors that you owe money to. This is another important factor that makes up a credit score and having fewer open lines of credit will greatly improve your credit score. Consolidation companies work by closing your credit card accounts and paying them all for you, leaving only one account open. This can be to your advantage in many ways.

If you're thinking about consolidating your debt the most important thing to do is be realistic. While it may lower your credit score temporarily, think about the positive impact it will have on your financial life. Lowering and paying off your debt will also improve your credit history in the long run, helping you qualify for great terms in the future. If you're having trouble getting out from under the money you owe, debt consolidation may be just what you're looking for.