Today we have more opportunities than ever before to manage our finances and, if need be, consolidate our debt in order to pay it down. If you are feeling stretched by too many payments, or having trouble managing your various accounts, then debt consolidation can definitely be a smart financial move. The only question is, how will it affect your credit score?

Balance Transfers:

Who wouldn’t want to transfer the balances on several cards with various interest rates to one card with a low, or even 0% interest rate? Before you do this, just keep in mind the golden rule of balance transferring: Keep your accounts open. Closing your old accounts after you transfer the balance off of them can hurt your credit score.

Just like in part 1 of our series, closing those old accounts hurts you in two ways:

1) By lowering the overall amount credit you have available. (30% of your credit score)
2) By lowering the average age of your accounts. (15% of your credit score)

If you need to close those old accounts because they have high maintenance or yearly fees, then make sure you aren’t going to apply for a home or auto loan in the next six months to a year. Keep making on time payments to your new card, and your score will go back up.

Also, remember the second rule of balance transferring: Keep your old accounts open, but do not charge them back up. Unless you’d like to double up on your debt!

Debt Consolidation Companies:

Consolidating your debt through a debt management company does not necessarily hurt your credit score – but it can. It all depends on the company.

What happens when you make an agreement with a debt consolidation company:

Once you decide on a company and agree to a debt management plan, the company you have chosen will begin to negotiate with your creditors on your behalf. You will write a monthly check to your debt consolidation company, and they will disburse it to your creditors.
There will be a notation made on your credit report that you are repaying the loan through a debt management company. At this time, that notation does not hurt your credit score.

Here’s the problem:

Many credit card companies will not negotiate things like settlements or reduced interest rates until you are past due on their account. Unscrupulous debt management companies will allow your accounts to go past due for several months so that they can negotiate new terms with your creditors. This will hurt your credit score. The solution? Choose your debt consolidation company wisely. You can read more about how to do that here:

Have a question for us? Leave a comment below!

This entry was posted on Monday, June 30th, 2008 at 8:45 am and is filed under Credit Reports and Scores, Personal Finance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.