Credit Rating Recovery After Debt Consolidation

When your finances have got out of hand and you've decided to restructure them with a debt consolidation loan, it's usually recommended that you subsequently cancel all of your paid-off credit cards and close off your other lines of credit that have been repaid as part of the consolidation process. The reasoning behind this is that you need to remove the temptation to build up new unsecured debts on top of your new consolidation loan, leaving you in a worse position than ever. This is indeed good advice in general, but you may be surprised to hear that in certain circumstances this might not be the ideal way to proceed.

If, before consolidation, your finances were in such a state that your credit record became littered with missed and late payments, then closing off your credit lines will actually increase the length of time it takes to recover your previously high level of creditworthiness. The reason for this is simple: under the UK credit reference system, whenever you close an account, its details are frozen on your file for a period of six years before being deleted. This means that the damage done by your late payments will still impact on your credit rating for all that time, even though you've completely satisfied the debt and seemingly put things right. In contrast, open accounts record their data on a rolling system, where entries which reach the age of three years drop off your file, It's plain to see that keeping your account open will halve the time it takes for your adverse credit information to be removed from your record, and so your credit rating will be restored correspondingly more rapidly than if you'd followed conventional wisdom and closed off your unused credit lines. Of course, as with all things financial, things aren't as simple as that.

If your credit file shows that you already have access to a large amount of unused credit, this is in itself usually taken as a warning sign by potential lenders, and may reduce your ability to get credit - for example, you might find it more difficult to negotiate a new mortgage at a good rate during the three years it takes to restore your rating fully. It really is a balancing act, but if you're happy to sit out the three year period, this is the quickest way to restore your credit rating, so long as all defaults have been satisfied and other black marks removed whenever possible. In any event, the spirit of the conventional advice still holds: there's little point in going through the debt consolidation process if you then immediately start racking up new debts on your old cards and overdrafts etcetera. Even if you decide to keep your accounts open in the interests of speedier credit repair, then at least make it as difficult as possible for you to succumb to temptation. Physically destroy your credit cards so that you can't use them, and store your account details in a safe place where it will take some effort to retrieve them so that you can't use them on impulse without at least taking a moment's pause for thought.

Michael writes for Loan Vision, who offer information on secured and unsecured loans for use in a debt consolidation program or for any other legal use.