May A Debt Consolidation Loan Hurt Your Credit?

Many self-proclaimed financial experts claim that a debt consolidation loan will simply damage your credit and leave you in worse shape than you’re already in. They state that there are two main thoughts as to why these loans could harm your financial stability, but neither frame of mind really makes a strong case for avoiding these products.

One of the two ideas is that a debt consolidation loan will require that you pay off and close your existing credit cards. If all of your revolving debt was closed, there is some truth in the statement that your credit score may decrease. The credit score is partially based on the length of time your accounts have been open, and closing these could potentially harm your score. The fact of the matter, however, is that a loan consolidating your current balances could prevent you from becoming delinquent or defaulting on your revolving accounts. The repercussions of either of these actions would be far worse and take longer to rebound from. Some lenders may not require that you close your existing credit cards, so be sure to find out in advance.

The other idea is that taking out a loan to consolidate debt shows that an individual was irresponsible with money management, and is now in need of drastic measures. Taking the necessary steps to handle one's finances shows that they are making every effort to be responsible. Simply put, lenders are very interested in the pay history of any account found on the credit report. The truth is that a negative pay history on multiple accounts would hurt your credit far worse than a good pay history on one consolidation loan.

Any time new loans are taken out, an individual’s credit score can be negatively impacted. However, the damage pales in comparison to that of a late payment. Debt consolidation loans help people get back on track, and even more importantly can help avoid bankruptcy. It is better to temporarily cause minor injury to your credit than it is to permanently destroy it. A credit score can rebound very quickly from a minor setback, but it takes a long time to bring a score up to acceptable levels after a bankruptcy, collection, or judgment.