How to Account for Bad Debt in Quickbooks
Is debt consolidation bad for your credit?
If what you owe is becoming an increasingly heavy burden, the best debt consolidation companies are where you might turn for help. Yet many people remain reluctant to approach such services in case it will affect their credit score. But is debt consolidation bad for your credit, or is there the chance that it could be actually be good for your credit standing?
What is consolidation of your debt?
Debt consolidation is an option used by people with multiple debts to bring all the separate borrowing that they have together into a single loan. The thinking is that by having all your debt in one place, it will be considerably easier to manage, seeing as you'll only have one payment to focus on making in any given month. Equally, if you can find a consolidation loan that has a lower rate of interest than what you've previously been paying, your one monthly payment should be lower than what you were paying out across your multiple loans combined before. For more information about it, take a look at our guide to the different types of debt you can consolidate.
What is your credit score?
Your credit score is a number that loan companies and credit card issuers look at when deciding whether you're someone that they would be happy to lend to. Your personal credit score will depend on your credit history, and provide lenders with clues as to whether you're someone who can be relied upon to repay their debt on time.
Having a good credit score can open the door to the lowest interest rates and best mortgages, credit cards, and personal loans. Similarly, however, a poor or bad credit score will likely see lenders offer you less favorable rates and, in the worse case scenario, reject your application for credit altogether. To learn more about successfully applying for credit, check out our advice on increasing your chance of acceptance when searching for a loan.
Does consolidation impact your credit score?
If you're already in debt, consolidating what you owe has the potential to change your credit score both positively and negatively, depending on the path you take. For this reason, anyone adopting a debt management plan needs to make sure they understand the terms of the agreement they're thinking of entering into.
When is it bad for your credit?
When approaching a debt service, there's a good chance that you'll be offered advice on better managing your money and budgeting. You'll also probably receive help to establish a debt repayment plan to help you get on top of your debt.
While this is positive, be aware of the potential impact on your credit score if the terms of the plan make it implicit that you close your other credit accounts to restrict your temptation to spend. This is because closing credit lines such as credit card accounts will cause a rise in your utilization rate - this is the ratio of your outstanding debt to the amount of credit you can borrow - which can give the impression of a worsening credit score overall.
While this may pose a problem if you're planning on applying for credit in the near term, anyone looking to consolidate their debts probably shouldn't be thinking about borrowing more in that time frame anyway. This dip can be quickly recovered as long as you carry on making payments for any outstanding debt you retain as you should.
In this respect, however, if your debt consolidation company has taken over the responsibility for paying off your existing debts, it is important that they do so in a timely manner. This is because payment history is the most significant contributory aspect to someone's credit score, making it essential to avoid any marks for late payment appearing on your credit history.
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Can consolidation improve your credit score?
The good news is that consolidating your debt can lead to an improvement in your credit score over time. This is mainly because your debt levels should fall as the months progress, so long as you stick to the debt management plans that have been put in place. Your utilization ratio should therefore drop in line with the reduction in your outstanding balances, and help push you towards a better credit score overall.
Indeed, according to recent research, 68% of consumers who consolidated their debts achieved an improvement of more than 20 points in their credit score. As Liz Pagel, senior vice president and consumer lending business leader at TransUnion, the organization behind the research, says, "We are seeing a shift in consumer credit preferences toward streamlining bills into a single monthly payment. Personal loans offer a predictable payment plan with set terms and fixed rates. Not only does debt consolidation make paying bills more simple, but more importantly it often results in a credit score boost for some individuals."
Remember also that if you find yourself needing to boost your credit score more quickly, the best credit repair services are on hand to help.
With over 20 years' experience in the financial services industry, Tim has spent most of his career working for a financial data firm, where he was Online Editor of the consumer-facing Moneyfacts site, and regularly penned articles for the financial advice publication Investment Life and Pensions Moneyfacts. As a result, he has an excellent knowledge of almost areas of personal finance and, in particular, the retirement, investment, protection, mortgage and savings sectors.
How to Account for Bad Debt in Quickbooks
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