What impact will various debt solutions have on my credit rating?

When you’re carrying debt, you’ll want to repay it as soon as possible – and there are various solutions available that could help you do this.

But while debt solutions can help you to clear your debts, they do come with their downsides too – such as they effect they can have on your credit rating.

Here, we’re going to take a look at how two of the common debt solutions could impact your credit rating.

Debt consolidation

A debt consolidation loan is, in simple terms, a new loan you can take out to repay your existing debts in one go. You’ll then be left with just one debt to one creditor – and make just one payment per month instead of several.

A debt consolidation loan would only be appropriate for you if you are actually able to manage your debts as they stand, but would like to simplify your finances and/or reduce the amount you’re spending each month.

If you like, you can arrange to repay your debt consolidation loan over a longer period of time than your original debts – this can allow you to pay less each month. However, it’s important to understand that by doing this you’ll be in debt for longer and will pay interest for longer too, so you could pay a fair bit more in total.

What effect will debt consolidation have on my credit report?

A debt consolidation loan won’t actually damage your credit rating – providing you can repay it, that is.

In fact, as long as you keep up with your repayments and repay the loan as you have agreed to, a debt consolidation loan could have a positive impact on your credit report – as you’ll be showing that you’re able to maintain your repayments and repay the money you’ve borrowed.

Debt management

While a debt consolidation loan may be suitable for someone who can manage their debts as they stand, a debt management plan would only be suitable for someone who can’t.

It involves (either you or a professional debt management company) speaking to your unsecured creditors, asking them to agree to changes to the original repayment agreements (a reduction in the monthly repayment amount, for example, and/or freezing/reducing interest and other charges on your debts).

Your creditors aren’t obliged to agree to any changes to your original agreements, but they’re more likely to if they see a debt management plan as your best route out of debt.

It’s important to understand that arranging to repay your debts over a longer timeframe may increase the overall cost – unless your creditors agree to freeze/reduce interest sufficiently.

This is only a brief run-through of what this solution is about, so to find out more about debt management, click here.

What effect will debt management have on my credit report?

By entering a debt management plan, you’ll be defaulting on your original agreements with your creditors.

This will be shown on your credit report and may affect the cost and/or availability for six years.

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Disclaimer: This information has been compiled and provided by CreditScoreQuick.com as an informational service to the public. While our goal is to provide information that will help consumers to manage their credit and debt, this information should not be considered legal advice. Such advice must be specific to the various circumstances of each person's situation, and the general information provided on these pages should not be used as a substitute for the advice of competent legal counsel.