Here’s What Debt Consolidation Does to Your Credit Score

Here’s a popular refrain among people trying to stay on top of their debts: There’s got to be an easier way. And for good reason, too. It’s no easy task to keep juggling multiple bills from a handful of different creditors each month, each account with its own distinct balance and interest rate to boot.

In fact, the average American spends $984 monthly on bills — spread across nine common expenses ranging from rent/mortgage to auto loan, insurance, utilities and more.

As you can imagine, it’s very easy for payments to slip through the cracks when you’re dealing with multiple balances each month. Furthermore, it can get even more confusing if you fall behind on payments and accounts go to collections.

Debt consolidation encompasses a collection of strategies designed to streamline the repayment process, making it both easier to stay up to date on debts and less costly in terms of the amount of interest you’ll pay.

Here’s a closer look at what you can expect from debt consolidation, including what it does (or doesn’t) do to your credit score.

Debt Consolidation 101: What You Need to Know

There are a couple different ways to approach debt consolidation, including:

Credit Card Balance Transfer

Instead of trying to pay off a high-interest credit card balance, you may be able to transfer it to a new card with zero percent interest for a given time period. The transfer will cost a fee but may potentially be able to save you more in reduced interest. The key is taking advantage of the window of opportunity during which the interest rate is reduced or eliminated altogether to really bring down your balance.

Personal Loan

Another route is securing a loan from a credit union, bank, income tax loans after filing, or online lender — then using it to wipe out all your other outstanding debts. Of course, the responsibility will then be yours to make timely payments on that loan for as long as it takes to pay it off in full. You’ll also typically need to have strong credit to qualify for a competitive loan in the first place.

Debt Management Program

You may decide to meet with a credit counselor to go over your financial situation and come up with a plan. They may suggest a debt management plan (DMP), which is another form of consolidation in which you make one payment each month to the credit counseling agency and trust them to split the funds among your creditors. Lenders are often more lenient about reducing interest rates or knocking off certain fees if they see you’ve committed to participating in a DMP.

Home Equity Loan

If you have equity in your home, you may be able to take some of that money out to repay your more urgent loans with higher interest rates. There will be processing fees to factor in, and you’ll need to be very careful about making your repayments on time because your home is at stake as collateral.

How Debt Consolidation Affects Credit Rating

Debt consolidation could temporarily cause your credit score to dip. Why? Because doing a balance transfer or applying for a consolidation loan will trigger a hard inquiry from lenders. And hard inquiries can dent your credit score by a few points. What is a good credit score? Anything from 670 to 739 with anything between 740 to 799 being very good and 800 being excellent.

Another way consolidation can affect your score is if it causes you to close credit accounts — a common requirement for debt management programs. Since creditors factor in the average age of your accounts and how much of your total available credit you’re using, closing accounts can lower your rating as a result. You can learn more about boosting your credit score at: https://www.boostcredit101.com/tradelines/

However, the negative effects of debt consolidation tend to pale in comparison to the negative effects of missing payments or failing to meet the minimum balance due. Over the long term, consolidation can actually raise your score because it helps you stay on track with your debts and gives you the opportunity to build up a strong payment history. Furthermore, consolidation can help you bring down balances, which makes your credit utilization ratio appear more favorable to lenders.

Debt consolidation may bring down your credit score in the short term, but has the potential to improve credit score over the longer term by helping you get a handle on your debts.