Is debt consolidation bad for your credit rating?

25 May2011

In the current financial climate, maintaining a strong credit rating could be more important than ever. A good credit rating is key to getting the best deals on things like mortgages, credit cards, personal loans and even bank accounts. Lenders have become increasingly cautious about who they lend to, so any problems on your credit history could potentially harm your chances of getting credit in the future.

Consolidating your debts won`t necessarily harm your credit rating - it depends on how you do it. On the one hand, a debt consolidation loan could actually help you protect your credit rating. But on the other hand, debt solutions like debt management plans and IVAs (Individual Voluntary Arrangements), which consolidate multiple monthly debt repayments into one, will have an impact on your credit rating.

How could a debt consolidation loan help me protect my credit rating?

In simple terms, a debt consolidation loan is just a new loan taken out to pay off existing debts. By doing this, you`ll effectively be rolling your existing debts into one, which can make the debt much simpler to manage (although it could increase the amount of interest paid overall, if you arrange to repay it more slowly).

When potential lenders are considering lending to you, they can check your credit history, which shows how you`ve handled your finances over the last six years. Once you`ve paid off your existing debts with your debt consolidation loan, they`ll see that you`ve repaid those debts in full.

Plus, you could find that it`s a fair bit simpler to keep up with just one debt (your new debt consolidation loan), instead of multiple debts. With just one payment to make per month, it should be easier to remember and easier to budget for - helping you avoid the kind of mistakes (making payments late, or not at all) that look bad on your credit report.

Of course, if you have any doubts about your ability to keep up with repayments on your debt consolidation loan, it`s probably best avoided.

Why could other debt solutions harm my credit rating?

Debt solutions designed to help with more serious debt problems - such as an IVA (Individual Voluntary Arrangement) or a debt management plan - work by reducing your monthly payments to an affordable level, but they`ll have a negative impact on your credit history.

However, this shouldn`t necessarily put you off. If you`re at the point where one of these solutions is required, the consequences of not entering a solution could be even more severe.

Take the debt test below to find out whether a debt consolidation loan or any other solution could help with your finances.

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Tags: debt consolidation, loans, bad for credit rating, credit rating, credit history

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