Debt Consolidation and Your Credit Rating

For the hundreds of thousands concerned about mounting and unmanageable debts, there is an array of potential debt solutions available. Take, for example, debt management plans, the Individual Voluntary Arrangement, Debt Relief order or, in the worst case, bankruptcy. But all of these will leave a mark on a consumer’s credit rating for at least six years.

This is one of the main reasons that those who can do, opt for a debt consolidation loan over any of the other solutions. In most cases, the debt consolidation loan need not have a bad effect on your credit score at all. Debt consolidation loans are often  not an option for those in the worst financial positions, largely because it depends upon a lender seeing fit to lend you more money than you’ve already been lent! But where possible, it is a solution that enables consumers to consolidate all their debts into one payment. Essentially, the debtor takes out a loan large enough to cover the total cost of all other outstanding debts. The funds of that loan are then used to pay off the individual debts, leaving the debtor with one simple payment to make each month, against the new loan. This simplifies repayments but can also, depending upon the terms of the loan, work out more cost effective. A large number of smaller debts can accrue numerous charges and interest which drives up the total amount owed significantly. If your credit rating is decent enough to obtain a debt consolidation loan, then the loan itself shouldn’t be a reason for any black marks against you. However, as with any form of financial product or service, missed payments or failure to adhere to the terms can and most often will result in negative marks on your credit record.