The answer depends on what method you use to consolidate the debt…
If you are going to consolidate by using a debt consolidation loan, your credit score would take a relatively minor hit when the creditor pulled your credit report. Since you will be using this loan to consolidate other debts, your total debt is the same, you are just using a different form of debt. As long as you do not cancel any credit cards, your credit score should not have much of an impact. One important aspect to consider when using a loan for consolidation is that if you are looking at a home equity loan, you would be trading unsecured debt (credit card debt) for secured debt (mortgage). Down the road if you end up having some major financial difficulties, this option could put your home in jeopardy.
If you decide to consolidate using a consumer credit counseling program or a debt management program, this type of consolidation will not affect your credit score. FICO (the credit score calculation by the Fair Isaac company) indicates that they do not consider these consolidation programs into their scores. That being said, if you start one of these programs with a 750 credit score, your credit score will not move off of the 750 due to the consolidation program. You should be aware that a debt management program will in fact show up on your credit report. While it will not affect your credit score, it will affect your ability to obtain new credit while you are on the program. This is due to the fact that if you apply for new credit, the new creditor will pull your credit report and see that you are on a debt management program. When a creditor sees this, it tells them that you are working on getting out of debt, because of that, they will not typically approve any new credit until you finish the program or opt out. Once you opt out or finish the program, and provided your other credit factors are acceptable, many institutions will provide new credit.
If a debt settlement type of consolidation is what you are considering, you need to make sure that you understand all of the consequences. Debt settlement will quickly ruin your credit score. With a debt settlement program you are instructed to stop paying your bills while you are saving enough money to actually settle your accounts. For each month that you miss a payment, your credit score will drop by as much as 75 points. Your creditors will continue to try to attempt to collect on these accounts, and they may end up going into “legal”. At this point it’s likely that the creditor will force payment through a judgment, where a judge will direct a garnishment from your wages to pay the debts. The settlement mark will be a fixture on your credit report for 7 years. The vast majority of lending institutions consider a “settlement” almost identical to a bankruptcy.
Before you choose to sign up with a company for any of these debt consolidation options, be sure that you check the company’s record with the Better Business Bureau. If the company that you are considering does not have an A+ rating, you need to find a more reputable company to help with your finances.