How Does Debt Consolidation Affect Your Credit?

When you’re struggling under a mountain of debt, the idea of debt consolidation can be appealing. It promises you’ll be able to pay off all your debts more easily with just a single loan. 

But how does debt consolidation affect your credit score? Is debt consolidation really a good idea for you? Is debt consolidation good or bad? The answers are a little different for everyone. Find out everything you need to know, and start down a debt-free path!

How Does Debt Consolidation Work?

In debt consolidation, you apply for one loan that will pay off all of your other debts. Imagine how exciting it would be to have all your credit cards or other debts paid off! 

If you qualify for a loan and use it to zero out your other debts, you’ll send monthly payments to just that one creditor, instead of three or more different credit card companies or other creditors. This offers a few advantages, including: 

• You might make a lower monthly payment
• You could get a lower interest rate, which means you’ll pay less in the long run
• You’ll spend less time paying bills, lowering your stress
• You’ll be given a repayment plan that has a clear end date

Just remember, your total debt will be the same. But you might be able to get better terms and interest rates from your new lender, which can make that debt easier to pay off.

How Does Debt Consolidation Affect My Credit Score?

A debt consolidation loan could raise or lower your credit score. Which will happen for you? Well, it really depends on what you do after you consolidate your debts.

Here are four ways you can improve your credit score with a debt consolidation loan:

1. Build better spending habits, promising yourself not to rack up more debt
2. Always send your monthly payments on time (very important to your credit score)
3. Add a different type of debt to your credit history—a personal loan instead of just credit cards (showing you can handle different types of debt)
4. Keep your credit card balances (totals) at zero or at lower than 30% of their limits

But there are ways you could hurt your credit score, if you’re not careful. Make sure you don’t: 

1. Pay your consolidation loan bill late
2. Apply for lots of different loans at once (because that lowers your credit score)
3. Rack up more debt on credit cards just because they’re empty

If you can’t slow down your spending, you could end up with even more debt, especially if you have credit cards. You might need a debt counselor or responsible family member to steer you in a new direction.

Is Debt Consolidation a Good Idea for You?

It’s great to talk to a credit counselor who can show you your best options. They might help you get part of your debt forgiven. They might help you consolidate your debts. Or they might tell you to go into bankruptcy to get faster relief (which is rarer).

Should you get a debt consolidation loan? It depends on your situation. Your options are to get:

• A personal loan from a bank, credit union, or a person who wants to invest in you
• A balance transfer from a credit card company that charges 0% interest for a time
• A home equity line of credit, home equity loan, or home mortgage refinance with cash out
• A debt management program, which helps keep you on track to pay off your loans

You might qualify for just one of those. Or if you qualify for more than one, you should find out the pros and cons of each one. They might all seem great at first, but you need to know about their downsides to understand the true cost of them.

For example, if you’re looking at debt consolidation, you should find out: 

• How long it will take to pay off the loan
• How much you’ll pay in total
• How it will affect your credit score

Get all the details before you pull the trigger on any plan. If you want expert guidance, get a free debt assessment from CreditAnswers. We want to help you get financially healthy fast!