Does Debt Consolidation Affect Your Credit Score? It Depends

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Debt consolidation is usually billed as a smart financial move, because it can boost your credit score and save you money.

But a few mistakes could actually hurt your credit or cost you more money in the long run. Here’s what to keep in mind when deciding whether to consolidate your debt and how to choose the best way to do it.

How Does Debt Consolidation Work?

Debt consolidation usually means taking out a loan to pay off existing debts, most commonly credit card debt.

These are technically personal loans that lenders often market as “debt consolidation loans,” which isn’t inaccurate. It’s just their way of letting you know how they can help you.

You’ll take out the loan, receive the funds and use them to pay off your credit card balances. Then you’ll repay the loan over time like any other loan.

You could also consolidate with a balance-transfer credit card or other kind of loan, such as a retirement account loan or home equity loanHowever, personal loans typically have the advantage of lower interest rates and no collateral requirement.

People with a lot of high-interest debt tend to look to consolidation because it simplifies repayment, and could reduce the cost of the debt through lower monthly payments, a lower interest rate or both.

Pros and Cons of Debt Consolidation Loans

While debt consolidation usually helps your credit score, there are some pros and cons to consider before you consolidate credit card debt or other high-interest loans.


Pros

  • Fewer monthly payments
  • Lower interest rate
  • Lower monthly payment
  • Boost credit score


Cons

  • Costs more over time
  • Could hurt your credit score
  • One larger monthly payment
  • Potential fee upfront or over time

5 Alternatives to Debt Consolidation

You might come across companies offering one of several ways to fix…

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