Effect of Debt consolation on credit rating

Debt consolidation is done in order to pay off your past debts. Companies which provide such services may also negotiate with companies to take off the interest and just let you pay the principal amount. It is quite important to maintain your debt consolidation report just as your credit report. It is necessary to improve the credit report and avoid damaging it in anyway. Understanding the effects of debt consolidation is important here so that you would know what not to do while consolidating your debt.

As any situation, there are both positive and negative effects of debt consolidation on your report. Let us begin by looking at the negative effects first.

Avoid missing any payments. Defaulting on your payment severely affects credit score. When you are consolidating debts, you are already in a bad situation and you do not want to make it even worse by defaulting on payments. Timely payments is the way to maintain your credit score.

Never close your credit card accounts. Closing them right after you have consolidated your debt may give an impression that you maxed out on your cards. The longer your accounts, the longer your credit history. Therefore, avoid closing accounts unnecessarily or you are putting your credit record in danger. This is because, by closing your accounts you also get rid of the credit history but you are still in debt.

Many loan consolidation services offer debt negotiation option. What it does is that the company will negotiate with the loan company to reduce the interest rate or get rid of it altogether. This may seem like a good idea but it is not. It severely impacts your credit history and makes bad impression of yourself because your credit records are impacted negatively. In the credit record it appears like you are finding ways to avoid paying all your debt.

Credit card companies often come up with new ways to attract customers. They do so by giving perks such as zero interest for first 5 months, or reduced interest in some cases. We might consider buying a new credit card every now and then to avail these offers, but that indeed makes bad impression in the credit record. It is also important that you pay the credit card bills on time in those 6 month offer periods or else the borrowed amount is charged with regular interest rates.

Now for some things that cause a positive impact.

Paying loan installments on time is always a good sign and really puts a good impression in the credit report. There would not be immediate change in your credit record because it is calculated based on your history. But every timely payment does make a difference on the long run.

Like I mentioned before, do not use multiple credit cards to spend money. Use a single credit card wherever possible, because longer the history behind one account better is your credit report. It is always preferable to use a couple of cards rather than multiple cards for availing low interest credit.

With this, I hope you take care of your credit report and avoid doing these mistakes which may harm you on the long run even if it seems sweet on the short run.