Does Debt Consolidation Hurt Credit? Bankrate Caret RightMain Menu Mortgage Mortgages Financing a home purchase Refinancing your existing loan Finding the right lender Additional Resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Bank Banking Compare Accounts Use calculators Get advice Bank reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Credit Card Credit cards Compare by category Compare by credit needed Compare by issuer Get advice Looking for the perfect credit card? Narrow your search with CardMatch Caret RightMain Menu Loan Loans Personal Loans Student Loans Auto Loans Loan calculators Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Invest Investing Best of Brokerages and robo-advisors Learn the basics Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Home Equity Home equity Get the best rates Lender reviews Use calculators Knowledge base Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Loan Home Improvement Real estate Selling a home Buying a home Finding the right agent Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Insurance Insurance Car insurance Homeowners insurance Other insurance Company reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Retirement Retirement Retirement plans & accounts Learn the basics Retirement calculators Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Advertiser Disclosure
Advertiser Disclosure
We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence.
Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money
The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. SHARE: LightField Studios/Shutterstock.com January 23, 2020 Bankrate logo The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here's an explanation for how we make money. Bankrate logo The Bankrate promise
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our banking reporters and editors focus on the points consumers care about most — the best banks, latest rates, different types of accounts, money-saving tips and more — so you can feel confident as you’re managing your money. Bankrate logo Editorial integrity
Bankrate follows a strict , so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. Key Principles
We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers. Editorial Independence
Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Bankrate logo How we make money
You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. is something that you may be considering if you have debt coming from multiple places. The idea behind debt consolidation is that if you put all of your debts in one place they will be easier to pay off. The pros of debt consolidation are that you have one bill with one interest rate that you pay on one due date. However, the issue with putting all of your eggs in one proverbial basket is that if you miss one payment, the consequences are much greater. How does debt consolidation affect your credit
When you consolidate debt, your credit score will go down a bit temporarily. This is because the consolidation will trigger an inquiry into your report. This decrease, however, is temporary. In fact, your debt consolidation has the potential to increase your credit score in the long term if you make consistent payments. Payment history makes up 35 percent of your credit score. Making sporadic payments, or worse, missing payments, is a quick way to destroy your credit score. However, making consistent payments on a debt consolidation loan can begin to push your score back up and show that you are making an effort to deal with your debt. How much does debt consolidation hurt your credit
Debt consolidation has the potential to be very positive for your credit, but if not handled well it can also have the opposite effect. That’s because putting a large sum of debt on to one loan will likely affect your debt-to-credit ratio, or credit utilization. Your credit utilization makes up 30 percent of your credit score. When your debt-to-credit ratio is in the 10 to 30 percent range, this factor has a positive effect on your credit score. However, when you consolidate debt and put a large sum on one credit line, possibly maxing out that credit line, your ratio will be considerably higher, having a negative effect on your credit score. As long as you are making consistent payments on your debt consolidation and not making new debt, this drop in your score should be temporary. Your credit rating is not just about your credit score, though. It looks at other factors like income, job stability, and ability to use dormant credit lines. Consolidating your debt will take certain lines of credit out of your credit mix. This will have an effect on your credit rating. However, that is only one factor in your credit rating. If you have a steady income from a stable job, your credit rating will be able to stay in a good place and you’ll also be in a good position to pay off your debt sooner. Consolidating debt with a balance transfer
One way to consolidate a debt is through a . If you have a good credit score, getting a balance transfer card can often prove easier than getting a personal loan. With a balance transfer card, you are essentially transferring your high interest credit card debt to a card that will offer you a lower interest rate. Many balance transfer cards offer introductory zero percent APR periods. The important thing to note here is that the rate is only for a limited amount of time. If you are planning to go the balance transfer route, it is essential to pay off the debt during the introductory period. This means that you need to have a solid repayment plan for how you will do that. It also means that you need to stay away from creating new debt. Keep in mind, too, that balance transfers are not free. Most balance transfer cards will charge a transfer fee that is usually between 3 and 5 percent of the amount you are transferring over. Consolidating debt with a personal loan
Getting a through a bank or a credit union is another way to consolidate your debt. The better your credit score when you apply for a personal loan, the better chance you have of not only getting a loan but also securing a lower interest rate. A personal loan will be paid out in a lump sum. In order not to create more debt for yourself, make sure you request the amount you need to pay off your debt, no more, no less. Once you have your loan, you’ll need to distribute the money to your current lenders to pay off your debts. If you are dealing with credit card debt, you will also need to decide whether you will close your accounts or keep them open. It’s usually a good idea to keep one or two accounts open to keep your credit history intact. After you’ve distributed the loan money to pay off your debts, it’s time to work towards paying off your loan. Loans will have a specific time frame for repayment that can be anywhere from one year to five years. It’s important during this repayment time that you keep any new debt to a minimum. Focus your efforts on repaying your loan. A personal loan is a kind of unsecured debt, which means that you won’t lose anything if you miss a payment. You will, however, see that missed payment affect your credit score. If you feel your monthly payments are out of reach, you can ask for a longer repayment period to lower them. Just know that a longer payment period means more time for interest to accrue on the loan. Other ways to consolidate debt
Take out a home equity loan
This is a kind of secured debt that allows you to take out money against the value of your home. It usually has low fixed interest rates, between 4 and 12 percent. The interest is usually tax deductible, which is a bonus. Home equity loans also have longer repayment periods, sometimes up to 30 years. This means you will have lower monthly payments and more time to pay off the debt. The specific terms of your home equity loan will depend on a variety of factors, including the equity in your home and your credit utilization ratio. The obvious con to this kind of debt consolidation is that you are putting your home at risk. If you default, you could be looking at a foreclosure. Borrow against life insurance
This is a good option to pay off smaller debts. You can borrow up to the cash value of the policy and there’s no mandate to repay it. Of course, if you don’t repay it you’ll lose your death benefits in the amount that you borrowed. If you have enough accumulated in the policy and don’t foresee needing it anytime soon, this could be a good option. However, you’ll be losing a bit of peace of mind as far as being able to take care of death expenses if the worst were to happen. Borrow from retirement 401k
If you are far from retirement or can afford to have money taken out of your check, this is an option for you. Policy rules will apply and you’ll likely only have access to a certain percentage of your money. This kind of loan also has a specific time frame for repayment, and you may have to pay it back with interest. Before making the decision to use these funds, it’s a good idea to talk to your benefits administrator to weigh all of your options. Despite all the rules, borrowing this way is easy because you are essentially borrowing from yourself. There’s no application process and no credit check. An obvious con, however, is that you are putting your retirement money on the line. If you don’t pay it back, you may be looking at working a few more years than you had planned. Not paying it back may also result in taxes and penalties, since 401k payments are considered income. Debt management
In order to begin this type of program you need to be able to demonstrate a level of income that will cover your monthly bill payments. You’ll be partnered with a debt counselor to help you develop a budget to ensure you can make consistent payments. Your plan will likely have you make monthly lump sum payments to your debt management firm that will be distributed amongst creditors until your accounts are paid off. When an account is paid off, your debt counselor will close that account. Debt counselors will negotiate your payment plan with your creditors, but there’s no guarantee that creditors will agree to the plan. If, however, you creditors do agree, you can’t miss any payments. Missing payments may invalidate the whole repayment agreement, which will put you back at square one with your debt. Debt settlement and bankruptcy
These two options are also ways to deal with debt, but they are basically for those that are at the end of the road. Both of these options have serious consequences and should only be considered when other options have simply not worked. Debt settlement is a complicated process that involves negotiations with your creditors to . is even more complicated, but will essentially put all of your assets up to pay for your debts. SHARE: Related Articles