Does a Debit Consolidation Company Hurt Your Credit Score?
- Debt consolidation companies act as a liaison between debtors and creditors. When a person falls behind on bills, a debt consolidation company can sometimes negotiate better interest rates or lowered payoff amounts. The debtor pays the consolidation company a set amount each month, and in turn the company pays the debtor's creditors from the funds.
- If a person with a credit score below 600 can complete the consolidation program, the negative impact of the program will have less effect than paying off the debt. For each debt that is paid, the credit score will rise, so the more debts that are reported paid, the better the credit score.
- Debt consolidation will negatively impact a credit score in this range, but is minimal compared to the positive impact repaying the debt will create. Only the most past due accounts are included in the debt consolidation, since these are the accounts that are causing the most harm to the credit rating. Including all debt in a consolidation program is frowned upon because the higher the percentage of debts in a consolidation program, the larger negative impact the program will have on a credit score.
- Credit scores in this range will take a significant hit from a consolidation program. According to Debtsteps.com, a person with a score above 700 should consider refinancing a current home mortgage, taking out a home equity loan or securing a personal loan from a private lender to pay off debts.
- Although debt consolidation can be a solution for many, in some cases, filing for bankruptcy could be a more viable option. For example, if a person with a credit score below 600 enters into a consolidation program, it could take longer to pay back the debt than if the person filed for bankruptcy. According to the United States Bankruptcy Court, a Chapter 7 bankruptcy case takes approximately four months to complete; a debt consolidation program requires all included debt to be paid in full to successfully complete the program.