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Will consolidating my debts affect my credit rating?

16/03/2010

If you have multiple debts and you`re finding it hard to keep track of all your outgoings - or if you want to reduce your outgoings and improve your financial wellbeing - you may have considered taking out a debt consolidation loan.

Debt consolidation loans can make a big difference to your finances - but remember that they`re not right for everyone, and you should make sure you know what`s involved before going ahead.

How can a debt consolidation loan improve my finances?

A debt consolidation loan can enable you to pay off multiple existing debts, after which you`ll repay the new loan in single monthly instalments. This can make the debt much easier to manage, and you`ll know that you`re only accountable to one lender, instead of several. (If, for example, you ran into financial problems later on and this meant you were struggling to make your payments to your debt consolidation loan, you`d have just one lender to talk to about this, rather than many.)

Many people who take out debt consolidation loans choose to repay the loan over a longer period of time than they would have repaid the original debts, making each payment smaller. This can free up additional cash each month, but keep in mind that you`ll also pay interest for longer this way, and could pay more overall as a result. Having said that, a debt consolidation loan could come with a lower interest rate than your current debts, especially if you`re paying off high-interest debts such as some credit card / store card debts.

Will my credit rating be affected?

Unlike debt solutions that involve breaking away from the original repayment agreement (such as a debt management plan or an IVA), a debt consolidation loan should not harm your credit rating, as it simply involves paying off your existing debts with a new loan.

In fact, as long as you keep up with all your new repayments, you`ll be demonstrating that you`re a responsible borrower, which should look good on your credit report. Settling your existing debts with a debt consolidation loan could well have a positive impact, since having just one debt should make it easier to stay on top of your monthly payments from now on, reducing your risk of missing payments.

Of course, if you don`t keep up with your payments, your credit rating will be damaged. This is one reason you should only take out a debt consolidation loan if you`re sure it`s right for you, and that you`ll be able to repay it. If you`re really struggling with your debts, a debt consolidation loan is unlikely to help - you may need to consider a different debt solution.

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