Does debt consolidation affect my credit rating?

If you have multiple debts and would like to simplify your finances and/or reduce your outgoings, consolidating your debts could be the right option for you.

When some people talk about `debt consolidation`, they are referring solely to debt consolidation loans. However, the phrase `debt consolidation` is often used to mean any debt solution which combines your debts into a single monthly payment - including a professional debt management plan and an IVA (Individual Voluntary Arrangement).

Many people thinking about this will worry about the potential impact on their credit rating. The impact on your credit score will depend largely on what type of debt consolidation you choose.

How will each type of debt consolidation affect my credit rating?

To answer this question, we`ll look at three of the most common forms of debt consolidation.

Debt consolidation loan

This is a loan big enough to pay off your existing debts, after which you will start making monthly payments to your new lender.

Because it is a loan - and because you`ll be paying off your existing debts in full - a debt consolidation loan will have no negative effect on your credit rating. In fact, it could even help you improve it (or at least avoid damaging it), as it should make your monthly payments easier to budget for (and then make). As with any loan, of course, it`s essential to be sure you can afford to repay it.

Debt management plan

This is an informal agreement with your lenders in which they agree to let you repay your debt in smaller amounts (than you originally agreed to) over a longer period of time, making the debts manageable again.

Because a debt management plan involves repaying your debts more slowly than you originally agreed, it will have a negative impact on your credit rating, which could make borrowing money more difficult in the future. You should only enter into a debt management plan if you are certain it is the right option for you.

Having said that, creditors would only accept lower payments if they can see that you can`t keep up with your agreed payments - so anyone who`d be eligible for a debt management plan would be very likely to start missing payments (and damaging their credit rating) anyway.

IVA (Individual Voluntary Arrangement)

This is a legally binding agreement in which you`ll repay an agreed percentage of your debt, usually over five years, after which your lenders will write off the remaining debt.

An IVA is a form of insolvency and, like a debt management plan, means you wouldn`t be sticking to the repayment terms you originally agreed to. It will have a significant impact on your credit rating.

If you`re thinking about consolidating your debts, click here or speak to one of our expert debt advisers today on 0800 195 2911.

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