Credit Rating Consequences of Debt Relief Consolidation Programs

Paying down multiple credit lines with steep interest rates can be a daunting prospect, which is why some people turn to debt relief consolidation programs for help in managing and simplifying these payments.



Debt relief consolidation programs help consumers by consolidating different bills into one monthly payment, according to Debt Consolidation Care. This consolidation frequently lowers the monthly payment for consumers, making it easier for people to eventually pay down their debt in a shorter amount of time. Reducing debt is a key way to improve credit ratings.



However, consumers should be aware that participating in debt relief consolidation programs can initially have a negative effect on your credit rating. These negative consequences may be counteracted by paying down debt, but consumers should expect an initial ding.

Initial Reduction of Credit Score

Enrolling in debt relief programs negatively impacts credit scores at the outset, according to Debt Consolidation Care. Because many people struggling to pay large outstanding debts already carry low credit scores, this can be especially damaging.

Drastic debt relief consolidation programs have a greater negative impact on credit scores than more moderate options, according to Debt Steps.

Settlements

Debt settlement programs, which involve negotiating settlements rather than continuing to make monthly payments, also negatively impact credit ratings, according to an article published by Bills.com entitled "Advice on Debt Consolidation and Credit Rating." But because settlements can significantly reduce the amount owed to creditors, some consumers may consider the lowered credit rating worth the risk.

Comparison to Impact of Bankruptcy

Although credit rating consequences of participating in debt relief consolidation programs are negative, consumers should keep in mind that if their other options include declaring bankruptcy, this may be the lesser of two evils, according to Debt Consolidation Care. Bankruptcy can have a devastating and lasting impact on credit scores, while the effects of debt relief programs are less permanent.

Gradual Improvement

Consumers participating in debt relief consolidation programs who continue making monthly payments and don't add to their debt by continuing to use credit lines may expect a gradual increase in their credit scores, according to Debt Consolidation Care.

Cases of No Impact

Not all elements of debt relief tools negatively impact credit ratings, according to "Advice on Debt Consolidation and Credit Rating." Some credit card companies occasionally offer balance transfers from other accounts at 0 percent interest or other low interest rates. Taking advantage of these offers does not negatively impact credit ratings. Debt consolidation loans, or loans that are used to pay down one or more credit accounts, are not taken into consideration for credit ratings, according to the article.