Consumers often will attempt to simplify their payment of debts by combining all or most of their outstanding debts into one. A finance company, called a debt consolidator, will buy up the unpaid portions of all of these debts and issue the debtor a new loan equivalent in size to these debts. Consolidating debts will usually not harm a person's credit rating and may even help in the long term.
Debt Consolidation
A person will generally pursue debt consolidation for two reasons. First, consolidating debts makes paying them logistically simply. Instead of mailing checks to a number of companies each month, the debtor has only to write a single check to one finance company. Also, if the finance company structures the loan in a certain way, the debtor may end up paying less each month in debt payments than he did before.
Credit Score
A person's credit score depends in part on the amount of outstanding debt that a person has. If a person consolidates his bills, the debt he has after consolidation will be about the same size as the debt he had before consolidation. In some cases, it may be slightly larger, as the consolidator may charge a fee. However, as the size of outstanding debt will not change much, neither will the person's credit score.
Mortgage
When a person applies for a mortgage, the lender will examine personal information when determining what rate to charge the prospective lender. This includes the person's credit score. If a person's credit score is unchanged after consolidating debt, it will not count against him when he applies for a mortgage. This is unless the lender thinks the consolidation indicates a lack of creditworthiness not reflected by the rest of the person's credit report.
Considerations
A person may actually improve his credit score by consolidating if he is able to pay back the loan on time for an extended period of time. If consolidating debts prevents the person from paying his bills late, which can harm a person's credit rating, debt consolidation can ultimately help the person get a better rate on his mortgage, as his credit score will improve.
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