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Do Debt Consolidation Loans Hurt Your Credit?
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Do Debt Consolidation Loans Hurt Your Credit?
Consolidating debts into one payment which is more manageable will improve your credit score and your budget, but there are also risks.
By Bev O'Shea personal finance writer | MSN Money, Credit.com, Atlanta Journal-Constitution, Orlando Sentinel Bev O'Shea is a former NerdWallet authority on consumer credit, scams and identity theft. She holds a bachelor's level degree of journalism at Auburn University and a master's in education from Georgia State University. Before coming to NerdWallet, she worked for newspaper publishers, including daily ones, MSN Money and Credit.com. Her work has been featured throughout the world in The New York Times, The Washington Post, the Los Angeles Times, MarketWatch, USA Today, MSN Money and other publications. Twitter: @BeverlyOShea.
Updated on Oct 12, 2021
Editor: Kathy Hinson Lead Assigning Editor Personal finance, credit scoring, managing money and debt Kathy Hinson leads the Core Personal Finance team at NerdWallet. In the past, she worked for 18 years with The Oregonian in Portland in roles including copy desk chief and team director of design and editing. Prior experience includes editing copy and news for a variety of Southern California newspapers, including the Los Angeles Times. She received a bachelor's degree in journalism and mass communications from the University of Iowa.
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Consolidating your debt can lower the amount of your monthly payments, however it can also cause an occasional dip in your credit score. Two common debt consolidation approaches are obtaining a .
Every credit application usually triggers an impact on your credit score, which can lower your credit score by a few points over several months. But the overall credit effect of consolidating debt should be positive, provided you make sure to pay on time and make changes to the habits that led debt to stack up.
We'll take a closer look at the potential impact on your credit score when you consolidate debt with an individual loan or balance transfer credit card as well as alternatives to consolidate debt.
Find out how your credit is assessed
See your free score and the factors that influence it, and get insights into ways to continue building.
How debt consolidation affects your credit
Combines several debts into one, ideally with a lower interest rate.
With fewer bills to handle, it aids in budgeting. Also, reducing the rate of interest can help you faster, because a greater portion of your money goes towards the debt, not the interest.
Consolidating debts using the help of a personal loan
Pros:
It generally requires a lower credit score for approval than the balance transfer card. (Not sure where you stand? Check your with NerdWallet.)
This can improve your situation If you only had credit cards because it's an installment loan.
You can combine multiple payments into one, simplifying your financial situation.
by reducing the amount of your credit limits you're using by transferring the balances of your credit card to an installment loan.
Cons:
It could result in greater debt if it is used up the newly available space for credit cards.
If you end up overextended and unable to make payments, late payments can harm your credit.
There are high costs to borrow money if you don't are aware of the APR.
The loan could come with the penalty of prepayment, locking you into a predetermined time frame for payment.
>> MORE:
Consolidating debt with a balance transfer card
Pros:
You may be able to obtain lower interest rates (often for a specific period of time), including a 0 APR for good credit customers.
The payment process is more flexible than with the loan.
No prepayment penalty.
(image: https://freestocks.org/fs/wp-content/uploads/2021/12/smiling_female_holding_her_phone_on_an_autumn_day_2-1024x683.jpg)Cons:
Your score might initially decline because of if you use a lot of the new credit limits of your card.
There could be interest due when you don't repay the debt by the time the introductory rate runs out.
Other options for debt consolidation
If these options don't appear to be a good match There are many other options that also can affect your credit.
Be aware that it's not a good idea to replace the debt that is unsecured (like credit card debt) with secured debt (like mortgages or a car loan) because you could lose your house or car if you can't pay.
: This can be reported by way of installment loan or revolving account depending on the loan kind you choose. Also, you'll be subject to a the credit report.
Debt management plan: Seeing the services of a credit counselor and signing up for a plan does not directly affect your credit score, however negotiating to pay less than the total sum due, or closing credit accounts can hurt your score. A DMP will be noted on your credit report while it's in place but not until the plan is completed.
The fact is that this information doesn't appear in your credit file, which means it doesn't affect the credit rating. But you're losing profits from investments The effect will increase over time. This is best as an option last resort.
About the author: Bev O'Shea was a credit reporter at NerdWallet. Her work has been published on the New York Times, Washington Post, MarketWatch and elsewhere.
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