How To Consolidate Debt Without Hurting Your Credit – Edited by Aylea Wilkins Aylea WilkinsArrow Right Editor, Student Loans Aylea Wilkins is an editor specializing in student loans. He has previously worked editing content on personal and home equity loans and auto, home and life insurance. He has been editing professionally for almost a decade in various fields with a primary focus on helping people make confident financial and purchasing decisions by providing clear and unbiased information. Connect with Aylea Wilkins on LinkedIn Linkedin Aylea Wilkins
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How To Consolidate Debt Without Hurting Your Credit
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Does Debt Consolidation Close Credit Cards When You Consolidate?
Consumer debt — from credit cards and student loans to personal loans and auto loans — reached a record high in the second quarter of 2022, the Federal Reserve Bank of New York said. If you’re among the group of Americans who carry heavy debt burdens, chances are you’re looking for creative solutions to get relief from those huge balances.
Debt consolidation is a popular option that can help streamline the repayment process if you owe money to multiple creditors. Organize your accounts in one place and save money by securing a low interest rate. However, this approach is not without its drawbacks, so you should be familiar with debt consolidation and what are the ways to minimize the possible negative consequences.
Debt consolidation is the process of taking multiple loans and refinancing them into one loan with a new lender. There are many ways to consolidate your debts. The most popular way is to take out a personal loan and use the proceeds to pay off your other debts, but some consumers prefer to use home equity loans or hellos.
The process is often the same regardless of the type of loan you choose. You start by comparing interest rates between a few lenders, see which one offers you the best deal, and apply for enough cash to cover your current debts. Once you receive your loan funds, you will pay off your loan and start paying off your new loan.
How Debt Consolidation Works
Debt consolidation loans can hurt your credit, but it’s only temporary. When you apply for a debt consolidation loan, the lender will run a credit check. This can lead to a hard inquiry, which can drop your credit score by 10 points. Hard inquiries only affect your credit score for one year.
Closing your credit accounts after consolidating balances can negatively impact your credit score. The average age of your credit accounts accounts for 15 percent of your credit score, with the older the better your score. When you open a new account or close an old account, the average age of your credit history decreases. So, it’s better to keep your old cards open – you never use them.
Despite the negative implications of debt consolidation, this debt management approach can improve your credit score in the long run. Payment history accounts for 35 percent of your credit score, so making on-time payments will boost your score. If you only have revolving credit, such as credit cards, adding a personal loan for debt consolidation can improve your credit mix and boost your score.
Also, your credit utilization — up to 30 percent of your credit score — can drop significantly by consolidating your debt. This figure is calculated by dividing your current card balance by your total credit limit. If you have a credit utilization ratio of more than 10 percent, you could see a ding in your credit score. However, if you pay off that balance with a personal loan, the utilization percentage will decrease and your credit score will improve.
Is Converting Credit Card Debt Into Personal Loan A Good Idea?
A common reason for consolidating your debt is to save money on interest. If you can consolidate your loans and get a lower interest rate, you can save hundreds or even thousands of dollars in total interest.
Another popular reason for debt consolidation is to simplify your monthly payments. If you have trouble paying your bills on time due to different due dates, consolidation can make managing your finances easier.
The most effective strategy for consolidating your debt starts with making a list of your current debts and credit cards. Include the total balance, interest rate, minimum monthly payment and total remaining balance.
Next, decide what type of debt consolidation option you want, whether it’s a personal loan, home equity loan, or balance transfer credit card. You should get quotes from several lenders and compare APRs, terms and total interest paid.
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Make sure you apply for these loans and credit cards within two weeks to avoid multiple hard inquiries on your credit report. Once you have all your offers, you can compare them with this loan consolidation calculator to see which lender you should choose.
If your goal is to eliminate debt, but you don’t want to take out a debt consolidation loan, there are some alternatives you can consider:
A debt consolidation loan is an option to pay off your debt. The best way to consolidate your debt without affecting your credit is to make a plan and stick to it. Although your credit score may drop temporarily, managing your debt and making timely payments can help improve your score.
While a debt consolidation loan may be the best option for some, you have other options. Other ways to reduce your debt and consolidate your debt include creating a debt management plan, taking advantage of credit card balance transfers, or adjusting your budget.
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Edited by Aylea Wilkins Aylea WilkinsArrow Right Editor, Student Loans Aylea Wilkins is an editor specializing in student loans. He has previously worked editing content on personal and home equity loans and auto, home and life insurance. He has been editing professionally for almost a decade in various fields with a primary focus on helping people make confident financial and purchasing decisions by providing clear and unbiased information. Connect with Ailea Wilkins on LinkedIn Ailea Wilkins is a teacher, author of Student Loans Don’t How To and Thinking.