Debt consolidation can have a positive influence on your credit score if you use the process correctly. Maintaining your revolving credit accounts, including credit cards, is a key component to ensuring debt consolidation helps your credit score. Consolidation helps your long-term accounts, like student loans, by making payments more manageable and helping you establish a lengthy payment history.
Student Loan Consolidation
Consolidating your federal or private student loans may help your credit score because it creates a new loan with a single payment that's easier to manage each month as opposed to remembering to make multiple payments to different loan companies. The loan also locks in the interest rate on the account which could save you thousands of dollars over the loan's life. The consolidation loan itself shouldn't adversely affect your credit score and it may actually help you with older loans if you were behind on payments when the consolidation loan occurred.
Home Equity Loan
A home equity line of credit or home equity loan is an extension of credit based on the equity available in your residential property. This loan may act as a consolidation loan to allow you to pay off creditors and effectively combine the debts under your home equity loan. Your credit score may be positively affected by a home equity loan because you can pay off your debts and still keep your credit accounts open. This increases your overall available credit. The key is to use your credit accounts responsibly after you've paid the accounts off to avoid delving deeper in debt.
Debt Management Plan
A debt management plan consolidates your credit card accounts under one monthly payment. Your debt management company takes your single monthly payment and distributes the funds amongst your participating creditors. This type of debt consolidation helps your credit because your credit accounts remain open and the balances are paid down over a fixed period of time. It's important to always use a properly licensed and certified debt management company in your state to avoid any potential scams or irresponsible handling of your finances which could significantly harm your credit.
Unsecured Consolidation Loan
An unsecured consolidation loan is a personal loan for someone who does not own a home or other real property to act as collateral. The loan is a one-time extension of funds you may use to consolidate your debts under one monthly payment. If your accounts remain open, the loan itself should not have an adverse affect on your credit score. The problems with an unsecured consolidation loan arrive in fees and high interest because the bank is taking a greater risk due to the lack of collateral attached to the loan.