What happens to your credit score when you restructure your debt?

There’s nothing wrong with taking on debt; in fact paying off your debt, big or small, can help you to build up a good credit score. But if your financial situation changes or you find yourself struggling to keep up with your monthly repayments, you may want to consider restructuring your debt. If you go down this route, it’s important to know how the different options could impact your credit score.

Debt consolidation products allow you to pool all of your debt in one place. You’re left with one loan that can be used to pay off your existing debts and you only have to make one monthly repayment.

Your new monthly repayments will likely be less than what you initially owed to different creditors, but this doesn’t mean that you’re paying less overall. What you need to remember is that your consolidation loan may have a longer repayment period so you could end up paying more in interest in the long run.

Whether or not you’re eligible for a debt consolidation loan will depend on your credit score and passing an affordability check. If this option is for you, start by checking which debt consolidation offers you qualify for on your ClearScore account.

Paying off one loan instead of many can make it easier to avoid missing payments, which will help you to maintain a healthy credit profile and credit score. When you repay your debt on time and in full, it tells your creditors that you’re a reliable borrower, which is great news for your credit score.

Debt refinancing is when you replace your existing debt with a new debt that has more favourable terms and lower monthly repayments. If you’ve made up-to-date payments on your home or vehicle loan, your credit score has improved, and your financial circumstances changed, you may be able to get a better deal on a new loan for your asset.

When you apply to refinance your home, your property will be revalued and your lender will review your credit history and conduct an affordability check. If your application is successful and you’re able to refinance your home at a lower interest rate, you could end up saving a significant amount over the life of the loan. Similarly, if you refinance your car, you take out a new loan to repay the balance of your existing debt.

If you continue making your monthly payments on time and in full, you’ll be able to maintain a healthy credit score, which will help you get better deals on future loan applications. But you want to avoid making multiple applications for credit in quick succession because every time you do, a lender (with your permission) takes a full look at your credit report when deciding whether to approve your request to borrow money. This leaves a mark on your credit report and signals to other lenders that you’re desperate for credit and a riskier person to lend to. Your ClearScore credit report will always show when someone has checked your report.

If you’re unable to pay off your debt in full, you can speak to a debt consultant about negotiating a settlement deal with your lenders. They can negotiate with credit providers on your behalf to secure a discount on the debt you’ve accumulated across your credit cards, personal loans and store cards. Typically, you’ll be asked to make regular deposits into a trust account under your name, administered by the debt consulting company. The money deposited into this account will go towards settling your debt.

Settling your debt instead of paying the amount in full could negatively impact your credit score and hurt your chances of being offered favourable terms on your next loan. When you settle your debt, your creditor agrees to accept less than what was initially owed, which will reflect in your credit history.

Even though the chances of your credit score taking a knock increases when you pay off part of your debt instead of the full amount, it’s better than not pay anything at all. You can always work on rebuilding your credit score once you’ve recovered from your financial troubles. You can find out more in our articles on how to improve your credit score and understanding what influences your credit score.