Can Debt Consolidation Ruin Your Credit Rating?

When the bills keep coming with no visible sign of denting steep debt, consolidating your debt into one manageable lump sum might seem like a quick, easy fix. While some people may benefit from debt consolidation, others may want to choose alternate options. Learn whether debt consolidation will ruin your credit rating to determine whether this is the right option for you.

Credit Rating

Credit rating scores range from 300 to 900, reflecting a variety of factors used to determine credit worthiness to potential lenders, such as banks or credit card issuers. Factors included in the determination of your credit score include amount owed, types of credit used (installment loans like student loans or home mortgages are viewed more favorably than credit cards), length of history with lenders, how recently new credit has been added and payment history. Making on time payments of more than the minimum required payment is viewed favorably. Missed or late payments hurt your credit rating.

Debt Consolidation

Debt consolidation involves gathering debt under the umbrella of one new loan. This way, consumers make one lump payment rather than multiple payments to various lenders. Examples of debt consolidation include taking out a home equity loan, refinancing your home for greater than the amount still owed to direct extra cash toward paying down multiple debts, refinancing your car, getting a personal loan or turning to a nonprofit community organization, such as the National Foundation for Credit Counseling, for outside help.

Rating Risks

Credit ratings may take a hit when consumers turn to riskier debt consolidation options. Turning to a debt consolidation company can be especially risky. Some companies lure in consumers with quick loans that are promoted as an easy way to eliminate debt. These companies charge sky-high interest rates so you'll wind up paying much more than what you would have owed without consolidating. Your credit rating may be dinged for taking out a new credit line, but could also suffer in the long run since it will take you longer to pay down the balance due to steep accumulated interest. Disorganized operations may make late or missed payments on your debts, causing grave damage to your credit rating, according to MSN Money. And taking the balance-transfer route on new credit card offers can hurt your credit rating because you are opening multiple accounts. When those enticingly low interest rates expire, you may be saddled with high interest rates that extend your repayment period.

Debt Settlement

While debt consolidation may not ruin your credit rating, make sure you're not signing up for debt settlement. This option involves settling with your lenders to pay less than the stated balance for hospital bills, credit card payments and other obligations. Settling debts sends a red flag that lenders view a consumer's ability to repay loans as slim, so that settlement becomes a more attractive, less-risky option for them. It can also topple your credit rating, since it indicates you were unable to repay debts owed.