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Will a debt consolidation loan effect your credit rating?

Updated on January 31, 2012

How is your credit rating determined?

What exactly does your credit rating reflect?

Your credit rating is essentially the ongoing record of your ability to pay back debt. It is a tool used by potential creditors to see if you are likely to pay your bills in the future. There is a fundamental idea that past performance often indicates future performance and creditworthiness follows this basic principle. Creditworthiness, or the ability to obtain credit It is mostly based on your past performance paying back debt. If you have been late or defaulted on numerous bills, you will most likely be considered a greater risk to a potential creditor and will therefore have a lower credit rating. Having a lower credit rating basically means that any potential creditors are taking a greater risk on giving you credit, which they then make up for by charging you a higher interest rate. It may sound unfair to charge someone more because of something that has happened in the past, as often when people are late with payments or default on their debt, there is a reason behind it (medical bills, car accident, job loss, etc...) but if you take the perspective of the creditor you will see that the added risk needs to be accounted for by added return. Let me put it in a slightly different way, by breaking it down to a very simple concept: If you have two friends, Peter and Paul, and over the course of your friendship everytime you loaned Peter anything he would return it quickly and in as good or better shape then when you gave it to him ( lets say he used your golf clubs and returned them cleaned and regripped). Paul, however always forgets to return your stuff and if you do and up getting it back at all, it is generally in worse shape then when you handed it to him (your new wheelbarrow is covered in dried cement and the tire is flat, and you had needed it for a project the week earlier). Now, it only makes sense that you are going to be more comfortable loaning Peter items, while you have to be more careful with Paul. After several bad experiences with Paul it is likely you won't want to give him any more of your stuff, or if you do, make sure he agrees to return it when you need in the same or better condition or he will have to buy you another one. It really comes down to responsability, and generally if you show over time that you are responsible by continually to paying your rent or mortgage, credit cards, phone bill, cable bill, water bill, electric bill, and all the other various bills that all of us face every month you can maintain a decent credit rating.


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    • profile image

      Kevin 5 years ago

      "affect" not "effect"


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