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Debt Consolidation and Credit Scores
By Francine L. HuffMortgage Credit Problems Columnist
Many people turn to debt
consolidation loans to get their credit cards and other loans under control.
While it's understood that debt consolidation can help lower monthly payments
on bills, many people aren't sure how it will affect their credit score.
Short Term Impact
In general, a debt consolidation loan will have little
impact on a person's credit score in the short term. Although a loan will be
seen as a new debt, the borrower's credit report should reflect the fact that
other, older loans have been paid off. However, it's important for the borrower
to stop using those credit lines once they've been paid off to keep from
accumulating new debts, which could in turn lead to a lower credit score.
Closing Credit Lines
But should those credit lines be closed once they've been
paid off with a debt consolidation loan? That depends upon the individual
situation. Those who know they won't be able to resist running up those credit
lines again should go ahead and close them.
Because the history associated with a closed account will
remain in the credit report, it's important to make sure the report shows that
the customer initiated closing it. However, if they have plans to apply for a
mortgage or other significant loan in the near future, they may want to keep paid
off credit lines open to prove that they have a long credit history. After
closing credit lines people should get a copy of their credit report to look
for any mistakes, and contact credit bureaus to fix any they find.
Debt Consolidation
Services
Some people need help setting up a plan to reduce debt and
turn to a consolidation service. That usually involves getting help from a
credit counseling agency to set up a budget and monthly payment plan for debts.
Although a person's credit report will show that they're using a debt
consolidation service, it won't hurt their credit score. It may, however, make
it harder for them to qualify for new credit.
Long Term Impact
It's important to remember that debt consolidation is
designed to help people pay their bills on time by lowering interest rates and
monthly payments. Most creditors see this as a positive. It's the late and
missed payments, as well as high balances on credit lines that are more likely
to drag down credit scores in the long run.
About the Author
Francine L. Huff is a
freelance journalist and the author of The
25-Day Money Makeover for Women. She
has appeared on a variety of TV and radio shows.
About the Author
Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.
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