As anyone who has trouble making their monthly payments to a variety of credit card companies and other lenders knows, getting debt help in the form of consolidation loans and services can be one of the best decisions you make. However, many people are uncertain about the effects of debt consolidation on their credit score.
Does Your Credit Have to Be Affected by Debt Consolidation?
In theory, getting debt help does not affect your credit score. If you continue to make your payments on time and do not miss any, you should find yourself with the same score that you had prior to your debt consolidation. However, other factors can enter the picture and make a difference to your score (http://www.toptenreviews.com/money/debt/best-debt-consolidation-companies/).
The key to understanding this comes in the form of something called credit utilization, or the amount of your available credit that you have used. Moving all of your available credit balances to a new account will increase your overall available credit without increasing the amount that you owe. Technically, this should improve your credit score by raising your credit limit without raising your credit utilization.
When you get debt help, however, your original credit accounts may find themselves closing as part of the debt restructuring arrangement. This can hurt your credit score by reducing your total available credit, while leaving you with the same amount of debt. Whenever possible, make sure to leave your previous accounts open without using them after your debt consolidation.
How to Use Debt Consolidation to Improve Your Credit Score
As in the example described above, you can improve your credit score through debt consolidation programs if you keep your previous credit accounts open and refuse to use them. Not using the previous accounts is the most important element of this strategy because that is what keeps your credit utilization low. For as long as your use of credit remains favorably balanced with the amount you owe, your credit score should be okay.
Since debt restructuring can have a pronounced effect on your credit score, it is worthwhile to do whatever you can to make it a positive one. Credit utilization can be used to your benefit when approached correctly. If you know that you can keep your credit card accounts open without using them after getting debt help, doing so pays off in the long run.