Does debt consolidation tank your credit score, making your overall financial situation more bleak than it was in the first placed? Consolidation affects your credit for sure, but how?Well, the good news is that debt consolidation, or specifically debt management programs, do not hurt your credit score like they once did. In some programs, your score may tank until you have successfully remitted three, on-time payments, but after that, things usually begin to move in a positive direction again. In her post Understanding Your Credit Score, Liz Pulliam Weston points out that

Contrary to what you might have heard, credit counseling probably won’t hurt your credit score. It used to, but about three years ago Fair Isaac discovered that people in debt-repayment plans were no more likely to default or go bankrupt than other consumers.

“Today the FICO score ignores any and all references in a credit report to credit counseling or debt management programs,” Watts said.

Those references to credit counseling, by the way, are typically removed from a credit report after a consumer has successfully completed a repayment plan. That means there’s no lasting reminder on your credit history.

That’s great news for consumers deliberating between debt consolidation vs bankruptcy. The logic here is simple: in a debt consolidation scenario, your debts aren’t being ‘expunged’, so to speak, but rather you are entering into a responsible payment arrangement in good faith with the goal being to repay your debt. Bankruptcy, on the other hand, does relieve you of most of your debts, but it ruins your credit for a long time afterwards and even destroys the good credit that you have earned on your credit reports. Certainly there are times when bankruptcy is the only option but it should always be that - ‘the only option’.

So, count this as a myth dispelled. The final verdict is that while debt consolidation does have an affect on your credit score temporarily, that effect corrects itself over time and, under all circumstances, is a better alternative than bankruptcy.

Read the full post Understanding Your Credit Score at Campus411.org.

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