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Can debt consolidation affect my credit rating and how?

One concern that many people have is that tackling their debts through debt consolidation can negatively affect their credit rating. And, having a lower credit rating can make it more difficult to secure loans, credit cards and mortgages in future.

So, does debt consolidation actually affect your credit rating? And, if so, how? We answer these two questions here.

What is debt consolidation?

Debt consolidation involves bringing all your different unsecured debt repayments together into one monthly payment. This is often in the form of a debt consolidation loan but it doesn't have to mean a loan.

Debt consolidation generally makes your finances easier to manage and will often reduce your interest charges and/or your monthly repayment.

Whether debt consolidation affects your credit rating or not depends on what kind of debt consolidation solution you are considering. Keep reading to learn more.

2 ways that debt consolidation will not affect your credit rating

  1. A debt consolidation loan

    A debt consolidation loan won’t generally have a negative effect on your credit rating. Indeed, if you keep up your repayments responsibly and on time, you may actually find that it helps your credit standing.

    If you have several unsecured debts such as loans or credit cards to repay each month with varying interest rates, it may help to take out one large loan. This enables you to repay all your smaller debts and you will often be charged a lower interest rate.

    If you keep up your repayments on your debt consolidation loan, this will show on your credit file. It will prove that you are capable of responsibly managing credit and making all your payments in full and on time. This could actually help improve your credit rating.

  2. Debt consolidation on a credit card

    Consolidating debts on one credit card can also help you without damaging your credit rating. This form of debt consolidation involves moving various debts onto a credit card with a nil or low ‘balance transfer’ rate.

    As long as you make at least the minimum credit card payment every month, you can pay as much or as little towards that debt as you like. As your debt isn't accumulating a high rate of interest, this could make it easier to pay off.

    And, as with a debt consolidation loan, actually repaying your credit card on time every month can demonstrate that you are capable of responsibly managing debt. This could help your credit rating.

While there are some ways of consolidating your debts while keeping your credit rating intact, some alternative methods may have a negative effect. We look at these next.

Some forms of debt consolidation can affect your credit rating

As well as loans and credit cards, there are other debt solutions that can help you bring their unsecured debts together so you make just one payment per month.

A debt management plans could help you if you can’t manage your unsecured debt repayments - but would be able to afford them if they were smaller. A debt management plan involves agreeing a repayment plan for your debts which generally involves your creditors agreeing to a lower repayment for a period of time.

Though debt management plans have their advantages, entering into such a plan and making smaller repayments on your debts will negatively affect your credit rating for up to six years.

However, it may still be a good debt consolidation option for you if you want to clear your unsecured debts without taking out another loan. Alternatively, it may help you if your credit rating is currently too poor to obtain a loan or a low interest rate balance transfer credit card.

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