Debt Consolidation & Credit Rating

Credit scores are used to determine everything from loan interest rates to employment. Falling behind on credit payments negatively impacts your credit score and chances for applying for new loans and credit. One option borrowers can use to pay off debt is a debt consolidation or debt management program. These programs are offered through lenders and credit counseling agencies. Debt management plans usually show up on credit reports, but have minimal impact on credit ratings, according to Bankrate.com.

Function

Whereas lenders offer consolidation loans for paying off credit card debt, credit counseling agencies consolidate consumer debt from multiple accounts into one monthly payment. Unsecured debt such as credit cards, retail store cards and personal loans qualify under consolidation programs. In addition to consolidation services, credit counselors handle borrowers' payments by disbursing them to creditors directly. Since credit counselors act on the borrower's behalf, they receive commission on a percentage of the client's payments from credit card companies.

Significance

A May 2010 CNNMoney article stated approximately 65 percent of adults had not checked their credit reports during the past year and more than 30 percent of adults were unaware of their credit score. Credit ratings factor into everything from finding and landing a job to purchasing a new home. Moreover, a January 2010 Society of Human Resource Management survey reported that 40 percent of companies conducted credit background checks on all job candidates, and 47 percent conducted credit checks on selected job candidates. Consolidating credit card debt helps borrowers reduce their credit-to-debt ratio and improve their chances for competitive interest rates on loans.

Benefits

Some of the benefits of debt consolidation include reduced interest rates and lower monthly credit card payments. Usually, credit counseling agencies stipulate that clients are not allowed to open new credit to prevent further damage to their credit rating. Debt management agencies also act as liaisons between the borrower and the credit card company. In addition to consolidating debt into one single monthly payment, credit counseling agencies help negotiate agreements with credit card companies on late fees, letters and calls from creditors. According to LendingTree, consumers who take out debt consolidation loans can eventually improve their credit score by paying the loan consistently for at least one to two years.

Considerations

Borrowers should choose a credit counseling or debt management agency that is responsible and on time with monthly payments. For instance, if the debt management agency is late or misses a payment, the borrower's credit rating can be adversely affected. Additionally, there are fees for enrolling and participating in programs that consolidate and help consumers manage credit card debt. Besides consolidating debt through debt management and credit counseling agencies, borrowers can opt for a consolidation loan. Although this means taking on additional debt, credit agencies will note that the borrower's outstanding debt has been reduced or paid off completely. Consumers can also attempt to renegotiate interest rates and lower monthly payments with creditors directly.