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(A Credible Money Coach explains the potential credit implications of a debt consolidation loan.)
Dear Credible Money Coaches,
Summary Is it true that taking out a loan hurts your credit? — Tuila
Hello Twila, Thank you for your question. Debt consolidation affects your credit differently depending on how you structure it and manage your loan payments. It’s a smart way to manage multiple high-interest debts without hurting your finances.
If you are considering a personal loan for debt consolidation, compare interest rates from multiple lenders to get the best offer. With Credible, Check interest rates on pre-qualified personal loans in minutes.
Why do people consolidate their debts?
Consolidating your debt can help you with personal loans, credit cards, or home equity loan, to pay off multiple existing debts. This gives you one payment instead of multiple accounts to manage.
If you have good credit, you may be able to get a lower interest rate than the combined effective interest you have paid on multiple debts. It saves money in the long run.
how to consolidate debt
There are multiple options for debt consolidation, including:
Each of these options has advantages and disadvantages. For example, interest rates on personal loans are usually lower than those on credit cards. But continuing to charge your credit card can deepen your debt.
A 0% balance transfer can potentially avoid interest for 12 months or more. However, if you do not repay the balance in full before the promotional period ends, your interest rate may increase significantly.
If you are enrolled in a debt management plan with a credit counselor, they may negotiate with your creditors to pay you less than you owe, lower interest rates, or extend your repayment terms. However, if you are unable to repay your debt management plan as agreed, your credit may suffer.
Summary Loan Risk
Debt consolidation loans can lower your credit score in the short term. This is because the new credit application will lower your score. Also, using a loan to pay off your credit card and then closing it reduces your total available credit and lowers your credit score. (We recommend opening a prepaid credit card so you have more credit available in your name.)
However, if you keep making your new loan payments on time each month, your credit should recover fairly quickly from the minor blow of opening a loan.
Should You Get a Debt Consolidation Loan?
Debt consolidation loans are not for everyone. Think twice before using your retirement savings to pay off debt or risking your home with a home equity loan or line of credit.
Also, if poor spending habits are at the root of your debt, working with a qualified credit counselor to improve your financial habits may be worth more than lower interest rates on a debt consolidation loan.
If you decide a personal loan is right for you, Credible can help Compare personal loan interest rates From multiple lenders without compromising your credit.
Ready to learn more? Check out these articles…
Need Credible® advice for your financial questions? Email one of our trusted money coaches. moneyexpert@credible.comMoney Coach can answer your questions in an upcoming column.
This article is for general information and entertainment purposes. Use of this website does not create a professional-customer relationship. Information on or obtained from this website is not a substitute for legal, tax, real estate, financial, risk management or other professional advice and should not be relied upon. If you require such advice, consult a licensed or knowledgeable professional before taking any action.
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About the author: Laura Adams is a personal finance and small business expert and award-winning author, money girl, the highest-rated weekly audio podcast and blog. She is frequently cited in the national media, and millions of readers and listeners benefit from her practical financial advice. It is about enabling people to live more prosperous lives. She earned her MBA from the University of Florida and lives on her beach in Vero, Florida.follow her LauraDAdams.com, Instagram, Facebook, twitterWhen LinkedIn.
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