Will a Debt Consolidation Loan Affect My Credit?

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(The Credible Money Coach explains the potential credit implications of a debt consolidation loan.)

Dear Credible Money Coach,

Is It True That a Debt Consolidation Loan Will Hurt Your Credit? – Twila

Hello Twila, and thanks for your question. Debt consolidation affects your loan differently depending on how you structure it and manage loan payments. It can be a smart way to manage multiple high-interest debts without hurting your finances.

When considering a personal debt consolidation loan, compare interest rates from multiple lenders to get the best deal. Believable makes it easy View your prequalified personal loan rates within minutes.

Why do people consolidate debt?

When consolidating debt, open a new credit account, e.g. B. a personal loan, a credit card or home loanto settle several existing debts. This leaves you with just one payment instead of managing multiple accounts.

If you have good credit, you may be able to get a lower interest rate than the combined effective interest rate you paid on multiple debts. That saves money in the long run.

Ways to Consolidate Debt

There are several options for debt consolidation, including:

Each of these options has advantages and disadvantages. For example, interest rates on personal loans are typically lower than interest rates on credit cards. But if you keep charging credit card fees, you could find yourself in even more debt.

By making a 0% balance transfer, you can avoid interest for 12 months or more. But if you don’t withdraw the entire balance before the end of the promotion period, the interest rate could increase significantly.

When you sign up with a credit counselor for a debt management plan, they can negotiate with your creditors to pay less than you owe, lower your interest rate, or extend your repayment period. But if you can’t pay back a debt management plan as agreed, your credit score can suffer.

Risks of a Debt Consolidation Loan

A debt consolidation loan can lower your credit score in the short term. This is because new loan applications will cause your score to drop. And if you use the loan to pay off a credit card and then close it, you reduce your total available balance, causing your credit rating to go down. (It’s better to keep a paid-out credit card open so you have more available funds in your name.)

However, if you make your new loan payments on time each month, your credit should recover fairly quickly from the slight hit it took when opening the loan.

Should You Get a Debt Consolidation Loan?

A debt consolidation loan is not for everyone. I would caution you to think twice before draining a retirement account to pay off debt or jeopardizing your home with a home equity loan or line of credit.

And if bad spending habits are at the root of your debt, working with a qualified credit counselor to improve your financial habits may be more valuable than lowering your interest rate with a debt consolidation loan.

When you decide a personal loan is right for you, Credible can help Compare personal loan rates from multiple lenders without hurting your credit score.

Ready to learn more? Check out these articles…

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About the author: Laura Adams is a personal finance and small business expert, award-winning author and presenter of money girl, a premier weekly audio podcast and blog. She is frequently quoted in the national media and millions of readers and listeners benefit from her practical financial advice. Laura’s mission is to empower consumers to live richer lives through her work as a public speaker, spokesperson and advocate. She has an MBA from the University of Florida and lives in Vero Beach, Florida. keep following her LauraDAdams.com, Instagram, Facebook, Twitterand LinkedIn.

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