Credit Reports and Debt Consolidation

Q: How will a debt consolidation program that I adopt to settle my card arrears affect my credit rating?

A: Taking up a debt consolidation program makes limited impact to your credit rating in the immediate future, but failing to adhere to the repayment schedule can make a significant dent in the rating. Normally, your overall payment history decides your credit rating.
If you cannot exercise discipline in spending, it makes sense to close your card accounts as it can make an already precarious position worse. Though this does not obliterate your credit history connected with these accounts, you at least do not get into further debt. The other disadvantage behind closing accounts is the reduction of the credit that you become eligible for and this could make credit agencies wary about your financial strength.

If you still want to take no chances and close accounts, terminate the recently opened card accounts. Keeping some of the older ones open improves your credit rating by virtue of the time you have had those accounts. Make sure that your letter advises the creditor about your intention to close the account. He should not be under the mistaken impression that the card company has closed you out.
You cannot escape some de rating to your score when you do take the assistance of a debt agency to settle for a smaller amount than your original debt. Credit rating agencies also do not take kindly to the event of your debt agency taking their own sweet time to settle your debt and that can lead to further de rating.

Can a debt consolidation program do me and my credit score any good?

A debt consolidation program helps you settle your debt by decreasing the amount you owe and by enabling lower monthly payments, since the rate of interest is much lower under such programs. They also structure card debt at constant rate of interest, instead of a floating one that existed before and reduce the payment obligation amount. You therefore get the benefit of a lower rate of interest, less debt to be paid and a longer tenure over which this amount needs to be settled.

Life certainly becomes simpler since you need to make one payment to one creditor on a certain date every month. The credit score will reflect this fact as you having settled some card accounts. You will do well to leave a couple of card accounts open to meet any exigency. The credit that you can get on those accounts will help you in times of need.

While debt consolidation does help you, it is important to remember that the accumulated debt has to be settled at some stage and it is best to not get into such a sticky situation in the first place through prudent financial management.