How will debt consolidation impact my credit?

Debt consolidation companies are usually nonprofit organizations that negotiate with your creditors to reduce your interest rates and lower the monthly payment. This monthly payment is collected through an auto-debit of your bank account by the debt consolidation company and then they make payments to all your creditors. They collect a small fee from you for the service as well as being paid by the creditors. Since they are not always on time with payments and it is updated on credit that you are in a minimal payment plan, credit scores can be reduced even further with debt consolidation.

As a borrower, depending on the state of your credit you may want to negotiate a settlement on your debts. To get the best settlement pricing it is best to have a lump sum to send to the creditors once a reduced payment amount agreement is met. If your credit is already destroyed by late payments it will probably not make credit much worse and you will save in the interest and principal owed. You will have to pay taxes on whatever debt was forgiven since it is viewed by the IRS as income. If you are considering debt consolidation or debt settlement it is beneficial to speak with a bankruptcy attorney as well.

The key to making a decision is to know the state of your credit first and understand the consequences of each choice financially as well as the credit impact and time of recovery. Most people do not realize that a 90 day late payment on a mortgage can reduce scores over 120 points depending on how high the score was prior to the delinquency. These scores could be nearly equal to the score threshold seen after a settlement on an account. Bankruptcy will drop scores further but the savings on debt may be well worth the extra 100 point score reduction it will cause. This is all dependent on the individual’s financial state and future prospects. One comforting fact is credit is never terminal and can be improved even after all of these choices.

For example: A FICO score of 780 after a 90 day late payment on a mortgage drops to the 650-670 range. After a settlement it drops to around 620-640. After a bankruptcy it drops to the 540-560 range.