Will Debt Consolidation Improve My Credit?

Debt consolidation is an excellent way for consumers to reign in and control finances that are spread out through several places. By opting into a debt consolidation program, you can benefit by merging all your debts together into one lump sum, so it is easier to manage and pay off in a timely manner.

Most the time debt consolidation is done by a person securing a personal loan just for those purposes. Although the act of debt consolidation may not have any immediate affects on your credit, if the loan is paid off in time and full, you may experience an increase in credit score.

Having realistic expectations of debt consolidation

Debt does not generally accumulate over night. It is usually done through a combination of overspending and underpayment of bills. It may have taken a period of months or years to get into the financial situation you may be in and it will certainly take some time and effort to get out of the hole.

Since clearing up your debt is not instantaneous you cannot expect the debt consolidation to improve your credit right off the bat.

How debt consolidation affects FICO scores

Consumers opting to enter a credit-counseling program for debt consolidation should expect little or no affect to their FICO credit score. The Fair Isaac Corporation are the originators and managers of the FICO scoring system.

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Your FICO score is used by creditors to determine how risky it would be for lenders to provide you with money and that process is what determines the interest rate you are offered on your loans. For the past decade your FICO score does not include credit-counseling information as a weight factor in generating your score thus this move shall not generally improve your score.

However in the long run, by taking responsibility for your debt and taking advantage of a debt consolidation program can indeed improve your credit. As long as  you make timely payments to pay off your debt consolidation loan, you are taking important steps to restoring the faith creditors will have in you for future loans. By following a determined path to manage your debt consolidation properly and pay off your bills in full, you can improve your credit score.

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GOBankingRates Staff

These articles are written by the in-house GOBankingRates team.

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Will Debt Consolidation Improve My Credit?
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