Many people turn to debt consolidation companies to help lower their monthly payments and for much needed assistance managing their finances. However there is a common concern that working with a debt consolidation company may cause your credit score to become compromised. Some worry that their credit record will now be viewed as a bankruptcy since they are undergoing credit restructuring. Knowing exactly how working with a debt consolidation firm affects your credit can help answer your questions and offer peace of mind.

Debt consolidation and your credit score

When working with a debt consolidation company, your debts and loans are organized into one lump sum payment. Creditor phone calls and letters cease and your debt consolidation company acts as a intermediary between you and your creditors. Depending on the company you select, you will be required to sign a contract which lasts for a period of three to five years during which time your debt is being repaid. While in contract with your debt consolidation company, your credit report will reflect that you are working with a debt consolidation company. This is not as detrimental as it seems. Most lenders will only look at your credit score to make a determination for an extension of credit. Your credit score will not be any lower simply because you are working with a debt relief firm. When FICO calculates your score, they do not calculate a lower score simply because you are working with a debt relief firm. In fact Craig watts, the public affairs senior manager for FICO says “Frankly, we think consumers who participate in credit counseling shouldn’t be punished in their FICO scores.

New Credit Affected

Although participating in a debt consolidation plan does not lower your credit score, it may affect your ability to receive new lines of credit. Lenders who look at your score as well as your credit report will note that you are working with a debt consolidation company. They may look at this as a sign that you may not be able to handle additional debt. In fact most debt relief agencies do not allow you to take out new lines of credit during the time that you are undergoing financial assistance with them. In this situation, there should be little to no concern over the need for new lines of credit. Maxine Sweet, vice president for consumer affairs at Experian says “A typical creditor uses the scoring model. They don’t look at the comment. They look at the scoring.”

Be Proactive

Although participating in a debt relief firm does not affect your credit negatively, it is still necessary to be proactive and ensure that the company is making your payments on time. One of the main ways your credit score becomes negatively affected is through late payments. If a debt consolidation firm is not careful and does not submit your payments on time, you could end up suffering. Perform detailed research for any company you are considering and find out what other costumer’s experiences were. In addition, if you are working with a debt consolidation company and they fail to make your payments in a timely manner, they should be reported to your state attorney general’s office.

Conclusion

The truth is that your credit is solely your responsibility. Although a debt consolidation company is working for you, it is still necessary to stay abreast of the process and ensure that they are making timely payments. If your company is making timely payments on your behalf, then you have no need for concern regarding your credit score. Your credit score will remain the same and will in fact improve over time with the assistance of an efficient, well established debt consolidation company.

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