The recent deterioration of the economy has led to millions of people losing their jobs and countless others receiving a reduction in compensation. Unfortunately, this has caused many people to accumulate an insurmountable amount of debt. To repay their balances many people could benefit by working with a debt consolidation service provider which will combine all of a person’s liabilities into one affordable monthly payment. While this normally has a positive long-term affect on a borrower’s credit score, there are situations when consolidation could negatively affect someone’s score.
While consolidating your indebtedness should not normally negatively impact your credit score, it could hurt it if you stop making payments prior to receiving the consolidation. When working with a company that specializes in consolidating indebtedness, many consumers believe that they no longer have to make any payments to their creditors until the process is finalized. However, a consumer must keep making their payments as usual until the process is completed, at which point only the payments to the consolidated loan will need to be made. If you do not make your regular payments prior to the completion of the process you will likely miss at least one payment. This will then be reported by the creditors to the three major bureaus and your history and score will be negatively affected for up to 7 years.
Another situation in which your score could be affected by the consolidation process is if you receive any form of settlement in the process. In most situations a debt consolidation service provider will only combine your debt. However, in some situations they may actually end up negotiating a partial reduction in the amount of money that you owe. If they are able to partially settle the amount of money that you owe, your total financial liability will decrease and your monthly payments will likely be reduced as well. However, when this occurs the creditors will report that your balance was repaid, but they had to take a partial loss on it. This will be reported as a negative mark in your credit history and will lower your score for up to 7 years.
Your credit score could go down with debt consolidation if you do not pay the consolidating loan back as agreed. When your outstanding financial liabilities are combined into one loan, you will be required to repay the loan on a monthly basis. Repaying this loan should be much easier than repaying all of your previous loans because the interest rates will be lower and consolidation process will ensure that the payment is affordable for you. However, if you do not continue to repay the loan as agreed, the debt consolidation service provider will report the late or missed payments to the credit bureaus. This, in turn, will affect your credit score for up to 7 years.
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- Is Debt Consolidation Linked To A Reduction In Your Credit Score?
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- Will My Credit Scores Go Down If I Signed Up With A Debt Consolidation Company?
- Debt Consolidation Loans That Won’t Hurt Your Credit
- Is It Better To Use A Debt Consolidation Company or Contact Creditors Directly?
