Any legitimate debt consolidation company will not have a negative impact on your credit score. Despite popular misconceptions, FICO doesn’t actually consider whether or not you are in such a program when it computes your score.
This doesn’t mean that consolidation has never hurt anybody’s score, but it does mean that as long as you are dealing with a reputable organization and you follow the program properly, it won’t hurt your score. In fact, it should actually help it in the long run.
How a Reputable Program Works
A reliable consolidation organization should be fairly modest about what it can do. It should only offer its services to people who need it, and it should have membership with the National Foundation for Credit Counseling. Ideally, it should also have a good rating with the Better Business Bureau and it should be licensed and have little or no complaints with the Attorney General’s office.
The goal of consolidation is simply to reduce the amount of money you need to spend each month on debt. You can sometimes do this on your own using a loan, but in the context of a program it means that some negotiation will be necessary. A representative will collect financial information from you in order to verify that you can’t pay your bills on time. They will then use this information to negotiate with your creditors and get your monthly payments reduced.
Especially with unsecured debt, your creditors will usually be willing to negotiate. This is because, while the new plan might take longer for you to pay off, they will still receive the debt back in full. They can’t be certain that this will be true if you end up bankrupt or if they take you to court.
Consolidation reduces your monthly payments, not your overall debt. If you stick to the program, you will be making you payments on time, which will actually improve your credit rating.
Information about your involvement in the program will be added to your credit report, so it may be difficult to obtain new credit while you are in the program, which should be of little consequence because you have already pushed your debt to the limits if you need to consolidate.
When You Can Hurt Your Credit
Obviously, a supposed debt consolidation program that is actually a scam operation can hurt your credit. If they take the money and run, your creditors aren’t getting paid.
If the organization asks you to intentionally fall behind on your payments, this will also hurt your credit. You should only agree to this if you don’t care about your credit rating at all.
Finally, the term consolidation is sometimes used interchangeably with debt settlement. Settlement is when your representative actually tries to get your total debt reduced without paying. This requires avoiding making payments for months or years, which obviously hurts your credit.
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