DC Affect Credit Rating

Will a debt consolidation loan affect my credit rating?

If you're thinking about taking out a debt consolidation loan, you may be concerned about the effect it might have on your credit rating. The state of your credit rating can affect the cost and availability of credit in the future, so it's an important point.

Will debt consolidation affect my credit rating?

When you take out a debt consolidation loan, you're simply using it to repay money you borrowed in the past. You're not asking any lenders to write off some of your debt, or accept lower payments, or give you a 'payment holiday' - or anything else that could damage your credit rating.

That doesn't mean it won't make a difference: your consolidation loan will appear on your report, and the debts you pay off with it will disappear. However, the actual amount you owe won't change (one £5,000 loan adds up to the same as five £1,000 loans, for example).

This article features more information on debt consolidation and your credit rating.

Will debt consolidation help me protect my credit rating?

It can do, depending on how you handle your finances. If you found you were often forgetting to make your other debt payments on time, consolidating your debts could be a step in the right direction in terms of protecting your credit rating. With just one payment to make per month, you should be much less likely to forget.

Similarly, it should be a lot easier to budget for. You'll have just one payment to make, so it'll be much easier to make sure you have enough money set aside for it. In the long run, you should be in a better position to stay on top of your debt until the day it's paid off entirely - and making your payments reliably will look good on your credit report.

Plus, many people who consolidate their debts take the opportunity to rethink their finances and figure out how much they can realistically afford to repay on a monthly basis, while leaving themselves some spare cash for unexpected expenses. If your payments to your debts have been taking up too much of your income, you could arrange to repay your consolidation loan over a longer time period, reducing the amount you'd have to pay every month.

Clearly, repaying any debt more slowly will delay the day you're debt free - and can increase the overall cost, due to interest, although this won't be the case if your debt consolidation loan charges a significantly lower interest rate than your original debts. In fact, it's quite possible you'll save money in the long run, as long as the rate's low enough (compared with the rates on your original debts).

Finally, you need to think carefully about your borrowing after you've taken out the consolidation loan. It's important to remember that your overall debt hasn't shrunk, just because the number of debts you're carrying has! In other words, be very careful about taking out further credit, or you could end up facing multiple new debts as well as the debt you've consolidated. Clearly, this can damage your financial health - as well as your credit rating.

A note about debt consolidation

If you're really struggling to stay on top your finances, there's a good chance that debt consolidation isn't the right approach for you. You may be better off looking into alternative solutions, such as debt management or an IVA (Individual Voluntary Arrangement).