Information On How Debt Consolidation Can Affect Your Credit Score

Debt Consolidation is plagued with a poor rep. many believe it is no better than filing bankruptcy. With all this scary information surrounding debt consolidation it can make people leery.

The truth about debt consolidation is it is not as bad as filing bankruptcy. Debt consolidation is helpful for paying back your debts. Debt consolidation is used for paying back all or some of your debt where bankruptcy is where you default on the entire sum of the debt.

There are different types of debt consolidation and they have different impacts on your credit score.

The Debt Management programs are for those who wish to eliminate their excess debt. The account agent will work with your creditors to agree to payment in full by accepting a smaller amount than is actually owed to them. Although this method is common for those who fall behind on their payments and are being hit with large late fees or penalties; It can have a very negative effect on your credit score.

A debt consolidation loan is the better way to go; you can reduce or eliminate high interest debts. The loan is made to pay off your debts in full and you will not default with your creditors in any way. There will be no negative impact on your credit score using this type of debt consolidation.

Your credit history length creates a portion of your total credit score. It is a small percentage but when you are working to get the best credit score possible it should be considered. When paying off your creditors in full and closing the actual accounts you may in fact be shortening your credit history length. Closing older accounts will have the largest impact. It is a good idea to pay the older debts in full but keep them open.

If you are planning on applying for a mortgage loan or any type loan you should obtain your full credit report that includes your credit score. Keep a close eye on your credit score for any effects each time you pay a creditor in full. Applying for the loan while your credit score is the highest will result in the best possible interest rate.

The things that will have the largest impact on your credit score are when pay a creditor any amount that is smaller than you owe, however when you pay the creditor the full amount that is owed your credit score will be affected in a positive way.

Debt to income ratio should be considered before you apply for a new loan. Make certain you have paid all accounts on time for at least three months. Allow older accounts to remain open even after you paid them in full to not decrease your credit history length.

Debt consolidation can be a wonderful method for eliminating high interest debts if used wisely. Any time debt consolidation is used to negotiate debts it is still considered a default on the loan and your credit score will always be affected poorly. If you have to use a debt consolidation program be sure that it is your only option, you may qualify for a debt consolidation loan instead.