Quick Answer: Debt consolidation’s impact on credit scores varies significantly by method: debt consolidation loans can improve scores since old accounts stay open, while credit counseling and debt settlement typically cause initial score drops. For $9,000 in credit card debt, a consolidation loan offers the best credit protection since payments are reported positively and cards don’t require closure.
“Dear Steve,
I need to consolidate credit card debt of $9,000.00.
Does debt consolidation go against my credit rating, or lower my score? Do I have to close out my credit cards with my creditors to go forth with the program?
Phyllis”
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Dear Phyllis,
The term debt consolidation encompasses so many options that it’s hard to tell exactly what you are considering.
In general, here is how the different approaches impact your credit score:
- Credit Counseling – Accounts closed and benefit of credit history lost. Your score will initially drop.
- Debt Settlement – Since you’d already be delinquent before settling the debt, your score would drop.
- Bankruptcy – A chapter 7 bankruptcy will probably drop your score initially but you can get right back to rebuilding it after 90 days or so. In a chapter 13 bankruptcy you’d have to wait till the end of the plan.
- Debt Consolidation Loan – Can help to improve your credit score since the old accounts do not need to be closed and your on time payments to the debt consolidation lender will be reported to the credit bureaus.
As you can see, there are many ways people think they can “consolidate debt.” The best approach for your situation would really depend on your current financial condition, the goals you want to achieve, and your current credit score.
If you want to know more about a true debt consolidation loan, read The Ultimate Debt Consolidation Loan Guide: Getting Approved, Acting Smart, and Being Wise.
Please post your responses and follow-up messages to me on this in the comments section below.
Dealing With Debt? Understanding your options is the first step. See how all your debt relief options compare — including ones most sites won’t tell you about. The Find Your Path quiz gives a recommendation based on your actual numbers, and the Scam-O-Meter checks any company’s complaint history before you sign. Federal Reserve research shows bankruptcy filers recover faster than those who don’t file.
