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Information on bill consolidation and credit rating

How damaging is bill consolidation to your credit rating?

How damaging is bill consolidation to your credit rating?  I have serious debt and need a solution for consolidating my bills.

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Bill's Answer
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  • Bill consolidation may hurt your credit score, but it depends on which option.
  • Debt settlement and bankruptcy are the most credit impactful.
  • Credit counseling does not impact FICO scores.

There are many different forms of consolidation and each of them have varying effects on your credit rating. I will discuss the main types of debt consolidation and their effect on your credit rating in brief below.

Debt Consolidation Loan

Many people think first of a debt consolidation loan when seeking debt consolidation help. Usually, this is reserved for home owners with equity in their homes that can be tapped to payoff other debts. This option typically means a second home loan (or home equity line of credit) or refinancing your primary mortgage. In a debt consolidation loan, you exchange one or more loans for another. The most frequent form is taking out a mortgage loan, which carries a lower interest rate and is tax deductible, to pay off high interest rate credit card debt. There is no credit rating impact with this kind of consolidation.

Credit Counseling

 Credit counseling, or signing up for a debt management plan ("DMP"), is a very common form of debt consolidation. There are many companies offering online credit counseling, which is essentially a way to make one payment directly to the credit counseling agency, which then distributes that payment to your creditors. Most times, a credit counseling agency will be able to lower your monthly payments by getting interest rate concessions from your lenders or creditors. Although most credit counseling programs do not impact your FICO score, being enrolled in a credit counseling debt management plan does show up on your credit report. Unfortunately, many lenders look at enrollment in credit counseling akin to filing for Chapter 13 Bankruptcy or using a third party to re-organize your debts. This is typically a good form of debt consolidation help if you have lots of high interest credit card debt and just want a lower monthly payment.

Debt Settlement / Negotiation

Debt settlement, also called debt negotiation, is a newer form of debt consolidation help that cuts your total debt, sometimes over 50%, with lower monthly payments. Debt settlement programs typically run around three years - so they are a short programs with low monthly payments that can save you the most money while avoiding bankruptcy. It is important to keep in mind, however, that during the life of your debt settlement program, you are NOT paying your creditors. This means that a debt settlement solution of debt consolidation will negatively impact your credit rating. Your credit rating will not be good, at a minimum, for the term of your debt settlement program. However, debt settlement is usually the fastest and cheapest way to debt freedom, with a low monthly payment, while avoiding Bankruptcy. The trade-off here is a negative credit rating versus saving money.


While there are many forms of debt consolidation help, many people with good to perfect credit who own homes should look into debt consolidation loans, while consumers with high credit card debt and poor credit may want to explore debt settlement or debt negotiation.

I encourage you to explore, to read more about these and other options available to you.

I hope this information helps you Find. Learn. Save.



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