According to the Fair Isaac Corporation (FICO), debt consolidation does not affect your credit score, as you are not removing or adding debt, just transferring it. However, methods used to consolidate debt may affect your credit score and deter lenders.
Benefits
While debt consolidation does not affect your credit score directly, transferring debt to a lower interest loan may reduce debt more quickly. Lowering overall debt aids your debt-to-credit ratio, thereby increasing your credit score.
Disadvantages
Consolidation involving debt management plans may prevent lenders from offering you a loan if they see you as financially irresponsible. Your credit report may reflect enrollment in a debt management plan.
Considerations
Closing accounts changes your debt ratio. If you transfer your debt from several revolving credit lines to one account and then close the initial lines, your credit score may drop.
Warning
If you make payments to a consolidation company and they pay your creditors, it may hurt your credit score if they are late with payments. Some companies intentionally let your payments become delinquent to negotiate better interest rates or lower the amount owed.
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