Debt consolidation is an attractive option for many people who find themselves faced with debt. However, there are various effects that bill consolidation has on your credit score that can be helpful or aversive to your overall credit health. Understanding what you are signing up for when you enlist in debt or bill consolidation can save you unnecessary confusion and complications in your financial future.
Bad Credit Score
One of the most common beliefs about debt consolidation is that signing up for a debt or bill consolidation program will adversely affect your credit score. This is an urban credit myth. Enrollment in consolidation programs are not reflected in your FICO score rating, according to a public affairs manager at Fair Issac. The enrollment in the debt program will appear on your score report but not be factored into the score itself.
New Credit
You should be aware that enlisting in a debt consolidation program may make it more difficult for you to garner new credit during the duration of your enrollment in the consolidation program. The reasons for this are simple: New creditors want to ensure that you will be able to pay existing debts before extending you new credit. So while your credit score is not affected by enrollment in consolidation, your ability to acquire new credit may be due to the belief that you may already have too much debt.
Paying for Consolidation
What is more important than your credit score during debt consolidation is your ability to pay your consolidation loan amount. Not paying your consolidation payment can result in a decreased credit score. Ensure that you find an amount that is manageable and pay your consolidation payment on time every month. Paying off your consolidation amount early will improve your credit rating and help get you back on track toward a more desirable credit standing with potential creditors.
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