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Does Debt Consolidation Affect Your Credit?

If you have credit card debt, the thought of paying it off takes up a lot of space in your mind. Working toward becoming debt-free is a great goal, and yet considering ways to pay it off, such as debt consolidation, can be nerve wracking. Is there truth to the statement that debt consolidation can hurt your credit? While this may be partially true, in the long run, debt consolidation is the best option to help you get out of debt.

How does debt consolidation affect your credit?

When considering a debt consolidation method, some popular options include taking out a debt consolidation loan or opening a balance transfer credit card. Both options can help you pay off your debt wisely, but they can also negatively impact your credit score. This is because applying for any loan or credit card requires the lender to conduct a rigorous credit check to determine whether they will approve your application or not.

Hard credit inquiry involves taking a thorough look at your credit history so that the lender can determine how risky it would be to lend to you. This type of inquiry can lower your credit score temporarily by a few points – usually for a few months. Fortunately, this shortfall usually won’t affect your credit score significantly unless you apply for multiple loans or credit cards within a short period of time. And, once you consolidate your debt and start paying it off, the result will be a better credit score.

how to consolidate your debts

When consolidating your debt, there are some tried and true methods including debt consolidation loans, balance transfer credit cards and credit card cash advances. Each is described in more detail below.

debt consolidation loan

A debt consolidation loan is a type of loan designed to help you pay off multiple debts at once and consolidate them into a single loan with one monthly payment. Choosing this type of loan can often result in a lower interest rate, saving you a considerable amount in interest payments over the life of the loan. By consolidating your loan into one monthly payment instead of several, this option also makes it easier to keep track of your loan and see your progress as you move toward paying it off in full.

Debt consolidation loans are usually a good option if you struggle to keep up with all of your debt repayments or may qualify for a lower interest rate than your existing loans.

You can see below if you pre-qualify for a debt consolidation loan.

balance transfer credit card

A balance transfer is another option for consolidating credit card debt and working towards paying it off. When you get approved for a balance transfer credit card, your debts from your other credit cards will be moved to the new card with a new interest rate. Similar to a debt consolidation loan, it will be easier to keep track of your monthly loan payments, which can be beneficial when looking to simplify your finances.

Many balance transfer credit cards will offer an introductory annual percentage rate (APR) of 0 percent. If you can qualify for this type of card, you can save a lot of money in interest — especially if you can pay the balance off before the end of the introductory period, when the lender starts charging interest. Will give A great option for a balance transfer credit card is the card_name card.

One thing to remember about balance transfer credit cards is that they usually charge you a balance transfer fee of around 3% to 5% of the balance transferred. Depending on your balance, this may negate any savings you’d see on interest from transferring your balance.

Cash Advance

Depending on your credit card issuer, you may be able to take out a cash advance to help pay off the debt. There are better ways to repay the loan as it can come with a much higher interest rate, which means you will end up paying more in the long run. However, using a credit card to pay off additional credit cards will mean that the balance is consolidated on one card instead of multiple cards, making it easier to pay off—provided you can afford the extra interest payments.

debt consolidation options

While a debt consolidation loan, balance transfer credit card, or cash advance may be good options for paying off debt for many people, other options may be better for other borrowers. These include personal loans, home equity loans or lines of credit, and cash-out refinances.

personal loan

Personal loans can be a good option if you want to avoid the debt consolidation loan route. You can take a personal loan for almost anything, including paying off existing loans. Like a debt consolidation loan, you can use a personal loan to pay off your credit card balances and replace them with one monthly payment that may have a lower interest rate.

home equity loan or line of credit

If you own your home, you can use a home equity loan or a home equity line of credit (HELOC) to pay off your debt. Lenders usually require a certain amount of equity in your home. Equity is simply the amount of money you own in your home and is calculated by subtracting the amount you owe on your mortgage from the home’s value. With a home equity loan, you will receive a lump sum amount borrowed against the equity in your home; A HELOC works similarly but gives you a revolving line of credit that you can use as you need it. With either option, you’ll have a second loan to repay, which is why this type of loan is often referred to as a second mortgage.

Home equity loans usually have fixed interest rates, so if you qualify for a lower rate, you can save on interest by using one to pay off your credit card debt. But you’ll want to remember that defaulting on a home equity loan or HELOC can result in losing your home — so if there’s even the slightest chance you’ll have trouble repaying it, you may want to look at alternative options.

cash-out refinance

Many people refinance their mortgages to lock in a lower interest rate to lower their payments or shorten the terms of their loans. But you can also use the refinance to pay down the loan by choosing a cash-out refinance. This type of loan will replace your existing mortgage with a new one for a higher amount. The difference between the amount you owe on the original mortgage and the approved refinance amount, similar to a home equity loan, will be paid to you in one lump sum. While a home equity loan is essentially a second mortgage, choosing a cash-out refinance means you’ll only have one monthly payment instead of two, making it a great option for many homeowners.

You can use the money from a cash-out refinance for anything you like, including debt consolidation. Similar to a home equity loan, missing your mortgage payments can result in the lender foreclosing on your home, so you’ll want to thoroughly weigh the pros and cons before choosing a cash-out refinance.

Frequently Asked Questions

Do you still have questions about debt consolidation and its impact on your credit? Answers to the following frequently asked questions can help you decide the best method for dealing with your debt.

Does Debt Consolidation Show Up on a Credit Report?

Yes; Since most debt consolidation methods involve taking out loans or applying for new credit cards, they will appear on your credit report.

How Long Does Debt Consolidation Stay On Your Record?

Like any loan or credit card, a debt consolidation loan or balance transfer credit card will remain on your credit report as long as the credit line remains open or until the loan is paid off.

What are the negative effects of debt consolidation?

While debt consolidation is generally a positive thing, it does have some drawbacks. These include potential up-front costs (such as balance transfer fees or loan origination fees) and the potential for higher interest rates. Additionally, a debt consolidation loan won’t solve all of your debt problems on its own – you’ll need to keep a close eye on your finances and create a realistic monthly budget to make sure you pay off your debt on time and in full. Do it every month. , or you could risk ending up with more debt than you had before consolidating your loans.

How can I repay my loan without hurting my credit score?

Applying for a new loan or credit card to pay off debt will have a negative impact on your credit, but the impact will be minor and temporary. The easiest way to avoid long-term damage to your credit is to make sure you keep up with loan payments and pay them back on time every month. It may seem daunting at first, but eventually paying off your loan will improve your credit score, which will make your life a lot easier.


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