Credit is so individual that it’s hard to give a simple answer to this question but the fact is, for many individuals, debt consolidation can actually help improve your credit score!

Debt consolidation is actually a new debt, but it is a debt that is used to pay off older debts. Any time you can pay off a creditor in full, that helps your credit score. (On the flip side, if you default on a loan, declare bankruptcy, or negotiate with a creditor to settle for less than the full amount you owe, that hurts your credit score.)

In most debt consolidation arrangements, you replace multiple smaller loans with one large loan. Having one payment is not only simpler (and saves stamps), it decreases the chances of your making late payments. Actually, having one payment and arranging for automatic withdrawal from your checking account virtually assures you won’t have any more late payments (plus saves even that one stamp). Late payments are a big factor in your credit score. Eliminating them will help. (Just as late payments hurt your score, timely payments help it.)

Your credit score also looks at the amount of debt you’re carrying compared to the amount of credit you have and you get higher marks the more unused credit you have.

 For instance, if you technically have the ability to charge $50,000 on all of your credit cards, but you’re only carrying $3,000 in debt, that’s a good thing. On the other hand, if you $50,000 in available credit and $50,000 in credit card debt, the credit bureau regards that as a bad thing. Why? It looks like you can't resist using every shred of credit extended to you. And since credit is only extended to people in a good position to pay, it means you're strapped for cash.

Debt consolidation can help your credit score. Let’s say you have $50,000 in available credit and are $50,000 in debt. That's not good for your credit score. You consolidate the debt and now have a loan for $50,000, which you use to pay off your credit cards. Your credit cards still offer you $50,000 in available credit but now you have zero debt on those cards. For your credit score, this is a good thing. (You know how $100,000 in available credit and $50,000 in debt, plus you just paid off a bunch of loans.)

It may seem hard to fathom, but shifting your debt in that way (and consolidation is really just a way of re-arranging your debt) makes you more desirable to potential lenders and thus creates a higher credit score.

One word of caution. While debt consolidation in theory involves putting all your debts together and getting one loan to pay them all off, individual debt consolidation programs may vary. Talk to your debt consolidation representative and ask how the debt consolidation will affect your credit score. It should improve it, at least with time.

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