Will debt consolidation improve my credit rating?

16 February 2010

A debt consolidation loan can make your finances much easier to manage. By paying off multiple debts - and turning multiple payments into just one monthly payment - it can make repaying your debts much simpler.

In some cases, debt consolidation can actually help you protect your credit rating - it won`t improve your credit rating as such, but it can help you avoid damaging it.

However, as with any loan, you must be certain that you can afford your repayments before you go ahead.

Debt consolidation loan: how it works

A debt consolidation loan works in much the same way as any other loan, except it`s designed to pay off multiple existing debts. You`ll take out a loan big enough to cover the debts you want to pay off, after which you`ll make single monthly payments to your new lender. So it can make your monthly budgeting a lot more straightforward, hopefully reducing the chance of you forgetting a payment, or running out of cash before you`ve met all your financial commitments.

As well as simplifying your finances in this way, it may also be possible to reduce your monthly outgoings if you decide to repay the loan over a longer period of time. However, keep in mind that this will usually also mean paying more overall, as you`ll be paying interest for longer.

However, a debt consolidation loan could still save you money overall if the interest rate is lower than the rates on your original debts. If you`re unsure about the maths, speak with an expert debt adviser.

Can debt consolidation improve my credit rating?

What a debt consolidation loan can do is make it easier for you to repay your debt at a comfortable rate - when you take it out, you`ll have the opportunity to assess your finances and figure out a repayment schedule you`re sure you`ll be able to stick to, leaving you with some leeway in your monthly finances for unexpected costs.

Once you`ve repaid your debt in full, your credit history will tell future lenders that you have borrowed money in the past - and that you repaid it. As long as you`ve kept up with your repayments to your new loan, you will have demonstrated that you are a responsible borrower.

Of course, there is another side to this: if you don`t keep up with repayments, your credit rating could be damaged. You should only take out a consolidation loan if you are sure you can afford to repay it - and if you can`t, you may be better off considering a different debt solution, such as a debt management plan (although this too would have an impact on your credit score).

For more information on debt consolidation and a range of other debt solutions, call 0800 074 8639 today.

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