How Consolidation Helps, and Hurts

Your credit score affects many areas of your life. Good credit will help you get good rates on loans and insurance. Bad credit can keep you from getting loans, and can even prevent you from getting some jobs. If you are thinking about debt consolidation, you should be concerned about how it will affect your credit. There is good news, and bad news about your credit score and debt consolidation. Read on to find out how debt consolidation affects your credit score.

On Time Payments: Good

If you have several credit cards, you might have trouble getting all the payments in on time. Perhaps some of the bills get lost on the kitchen counter at times. Perhaps the money isn't in the bank account. If, for whatever reason, you make a late payment every now and then, that can hurt your credit score. Getting a debt consolidation reduces your debt payments to one, which makes it easier to pay your debt on time. This can improve your credit score, as part of your score is based on making on-time payments.

Shorter Credit History: Bad

If you have had some of your credit cards for a long time, then that helps your credit. Part of your credit score is based on how old your credit history is. If you cut up your credit cards, your credit history may be shorter, and this can lower your score. You can prevent this by cutting up your newest credit cards, but save your oldest account. You can stick this card in a drawer or freeze it in a block of ice, because you don't need to use it any more, except perhaps to rent a car. This will also give you a little available credit, which looks good to lenders.

New Debt: Bad at First

When you get a debt consolidation loan, you will be taking on new debt, which can lower your credit score, at first. You also will have an inquiry made on your credit report, which will lower your credit score a little, but only for a short time. Paying off your other debts with your debt consolidation loan will give your credit score some points. Once you have had your consolidation loan for a little while and are making consistent, on-time payments, your score should go up.

If your credit is an immediate concern, debt consolidation might reduce your credit score a little bit, for a little while. You may not want to shop for an auto or a home loan at the same time that you are consolidating your debt, but then again, if you are consolidating your debt, you probably won't be looking for these loans right away. In the long term, as long as you can make on-time payments, your credit score should go up, as you show creditors that you can be trusted with the credit that you have.