If you're applying for debt consolidation, your goal will be to improve your short-term financial situation. While this process can be a useful tool, the relationship between debt consolidation and your credit score depends on the terms of your new loan, and your responsibility with the payments.
Debt settlement programs can hurt your credit rating greatly, because you'll only be paying a portion of what you owe. Your lender will then report this information to the three major credit reporting bureaus. If your lenders don't agree to list this loan as settled debt, you'll likely receive a negative mark on your report.
In some situations--such as when you're in extreme financial turmoil--this can have short-term benefits, especially if you don't qualify for other types of assistance or cannot pay your debts in full. Debt consolidation loans, on the other hand, require you to pay 100 percent of your debts over a longer period of time.
After debt consolidation, your credit report will be free of information regarding your old debt. Because you'll have less debt, lenders may evaluate you as a more responsible borrower. While this is beneficial, you'll have less outstanding loans and more available credit, which is usually viewed negatively by lenders, so your credit may still be damaged.
To minimize this effect, you may want to keep a few older accounts open when consolidating--but some lenders won't allow you to do this, so shop around. It's better to keep your credit utilization ratio high (ratio of current debt to the amount you can borrow), and limit the damage a low ratio can cause.
Once you get past the beginning stages of your debt consolidation loan, your credit score will improve if you make your loan payments on time. Make sure you're able to make all payments before taking out a debt consolidation loan, as a missed payment will lower your score.
To ensure your score continues to improve:
Establishing a debt repayment plan for your debt consolidation loan will help you make payments on time.