There is no black and white answer for what will happen to your credit score after a debt consolidation. Some choices that you make while handling the process can have a strong effect one way or the other, however. With the right consideration, you can use both debt consolidating company settlement services and loans to improve your credit profile with a long term outlook.
Are You Negotiating Down Debt?
If you are working with a debt consolidation company to negotiate down some of your obligations, you may end up having a little bit of a negative reaction on your credit score. Every company you negotiate with will have a different policy toward reporting settled debts. Some companies will make a negative report, especially when you’ve worked out a lower payment over time amount. This penalty should subside and start turning into a positive once you’ve paid the new amount on a regular basis for a year or two.
Some companies will settle with you to allow you to pay a lower amount all at once and will simply mark your account as paid in full, creating a positive report. When you work with a consolidating company to figure out how you are handling your specific bill situation, you can ask them to only accept settlements where the debtor agrees to simply mark your account as paid in full. This can reduce, or even eliminate, the penalty you might get for settling your bills at a lower balance.
Are You Using A Debt Consolidation Loan?
Unlike settling what you owe, a loan will have an almost guaranteed positive effect on your credit score. When you use a loan to pay off the full balance of your past bills, you can have every one of those obligations marked as paid in full. While you will still have a loan to pay off, it will typically be for a lower monthly payment than your past costs. This will make your overall payment load seem better, which may help you qualify for anything that considers your income in the future.
Over time, your credit will show improvement as you pay regularly on your consolidation loan. As long as you make your regular payment every month, your credit should continue to improve. Eventually, both settlement and debt consolidation loans will end up helping your credit score improve through the simple regular payments that you will end up making. You can also help your score by eliminating the negative marks for missing the occasional small bill that prompted you to consider consolidating debt in the first place. Choosing to consolidate your debt may seem like a significant credit risk, but if you are careful about managing the potential pitfalls you can come out of the process with a score that is higher than it has ever been.
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