Affect of Debt Consolidation on Credit Rating!

In America, large numbers of people try to end their financial problems by consolidating their debt. It can be very useful for people who are carrying too much credit card debt on their side. By consolidating the debt one can have a lower rate of interest along with longer repayment period. Many people are concerned about the affects of consolidation on their credit rating. Some believe it to be lowering the credit rating while some people the opposite. Here, I will tell you how exactly debt consolidation affects your credit report.

Working system of debt consolidation

In order to consolidate your debt, one takes a huge loan from the bank and uses it to clear all their pending credit card debts. The consolidation loan is a low interest loan having long term. If one consolidates the debts for a long period then automatically your monthly installments become lower. Also, if you are planning to take secure consolidation loans then you can also enjoy y the benefit of lower rate of interest.

Is consolidation harmful for your credit rating?

Debt consolidation cannot directly lower down your credit rating. Your credit rating drops down only if you make less than full payment. Consolidation the loan means you will be paying full debt to the creditor. It is not like debt settlement or bankruptcy where debt can be reduced or settled. Therefore, no direct blow is given to credit rating by consolidating debt.

However, debt consolidation can harm your credit rating indirectly. When you plan to consolidate your loan, it means you are at default on your original payment plan. And this information is leaked to the credit bureaus by your lenders. Thus, the credit ratings decrease having a negative sign on your report. The damage is not a major one and one can certainly build up their credit once again.

Also, in a direct way consolidation of debt can help you ameliorate the credit rating. This happens because you are required to make timely payments of the debt for a long period of time. And it is during the process that your credit score is improved significantly. Keep one thing in mind that it can backfire you if you do not make your monthly payments on time.

The effect of consolidation of debt will be felt on the rating even after seven years of bankruptcy and debt settlement. But without any doubt debt consolidation is one of the best debt relief programs. Your credit rating is not damaged in a significant manner. Therefore, the worthiness of your credit rating in not harmed by debt consolidation.

Majority of individuals can achieve financial freedom from debt consolidation but it is not suitable for everyone. The negative effect is just a temporary phase and the rating can be rebounded and improved as the time passes by. Make sure you have a clear understanding of all the things like terms and condition and associated fees. It is not as hard as people think to deal with unmanageable level of debt.