With many people in the UK struggling with unemployment and dealing with escalating debts, debt consolidation has become an increasingly popular option. One concern many people have with debt consolidation is how it affect their credit score. There are three main debt consolidation options in the UK, each of which has a different impact on credit scores. The three common debt consolidation options are debt consolidation loans, debt management plans, and individual voluntary agreements.

Debt Consolidation Loan
The first common form of debt consolidation in the UK is a debt consolidation loan. A debt consolidation loan is a loan provided by a new lender which is large enough to pay off all existing non mortgage debts. The debt consolidation lender will pay off the debtor’s existing loans and then set up a new easier payment plan. These are beneficial because it will extend the length of the repayment terms, which will lower the debtor’s overall debt payments.

Since a debt consolidation loan pays off all existing debts, it will have no negative impact on credit score. Often moving from heavy borrowing on credit or store cards and paying off your overdraft with a loan can be beneficial to your credit score as you are taking charge of your finance and setting a schedule for paying off your debts. Over time, if payments to the debt consolidation lender are made on time, the debtor’s credit score will actually increase.

Debt Management Plan
The second common form of debt consolidation in the UK is a debt management plan. A debt management plan is made between the debtor and their creditor and normally extends the repayment term, which in turn will allow the debt to have smaller monthly payments. This is different than a consolidation loan, because the debts are not paid off.

Since under the debt management plan the debtor’s are breaking the original credit agreement, the debtor’s credit score will be impaired, however if you are consolidating your debts due to missing your monthly payments the damage is likely to be less than continuing to default on your debts. Over time with successful payments, the debtor’s credit score should return to its original level.

Individual Voluntary Agreement
An Individual Voluntary Agreement (IVA) is an agreement in which the debtor will agree to pay back a certain percentage of their debt over a five year term. The lenders will then write off the remaining portion of the debt. The lender must agree to the IVA, and will only do so if they believe the debtor can make the IVA payments.

An IVA is unique to the UK and is a form of insolvency. Since the original debt will be written off, the lender will report the action to the credit bureaus and the debtor’s credit score will be significantly impaired. An IVA will not impair a credit score as much as bankruptcy.