How debt consolidation can raise your credit score

Debt consolidation is the act of combining many different debt balances into one new loan. There are a few benefits to this, such as helping people stay on top of their debt and lock in one single interest rate.

Most of the time, debt consolidation is going to raise your credit score. However, at first you may see it go down as you consolidate your debts. Making payments on time and paying down debt should cause your scores to go back up.

Debt consolidation can be extremely helpful, especially if you have high-interest debt. Balances from multiple high-interest credit cards can be difficult to manage or pay down. Many times paying the minimum balance is all a person can do, and it is still a costly and difficult burden to bear.

These debts can also add a significant amount of stress to your life. In these situations in particular, debt consolidation may be the best way to deal with the issue.

At its most basic, debt consolidation takes all the credit card balances and loan balances you have and merges them onto one new loan. This allows you to put all of these debts under one simple monthly payment.

There are a few ways to consolidate your debt, and you should understand each before moving forward.

Personal loans – A personal loan may help you consolidate credit and reduce stress, but it is only a good idea if you can get a personal loan with a lower interest rate. This allows you to immediately pay off your balances with higher interest rates, meaning you will save money on interest and make more progress paying off your debt.

Balance transfer cards – Balance transfer cards are specific credit cards that offer you a low or no interest introductory period when you transfer your balance to the card. This allows you a window of time to pay off more of the debt without accruing interest.

Home equity loans – Homeowners may be able to take a loan out against the equity in their home. While this is not right for everyone, these types of loans do tend to have lower interest rates than other options. However, as you are using your home as collateral, failing to pay the loan back may lead to you losing your home.

Retirement account loans – In some cases you may be able to take out a loan against your retirement account to consolidate debt. However, you may face steep penalties if you do not pay it back as agreed.

First and foremost, debt consolidation saves money in most cases. If you have been working to improve your credit score, you will likely now have a better score than when you took out all of your lines of credit.

If you were to take out one single loan now and consolidate all that debt, you will likely get a much better interest rate than you did before. Over the life of the loan, this can mean a decent amount of savings.

You should still do the math to be sure, as some accounts will charge you for balance transfers or other fees, and you want to be sure you are actually saving money before moving forward.

Additionally, debt consolidation can greatly simplify your payments, turning all of your previous payments into one single monthly payment. This can reduce stress and make you much less likely to make a mistake or miss a payment, which protects you from damaging your credit score.

Debt consolidation will generally improve your credit score in the long run. With that said, there are a lot of things happening at once when you consolidate your debt, and this can cause a few short-term changes to take place.

Because of this, you may notice your credit score fluctuate at first when consolidating debt. This is due to a number of different factors, such as:

It is important to note that these are generally temporary effects that will go away with time. Additionally, the benefits of consolidation tend to outweigh these minor inconveniences in the long term.

In most cases, consolidating your debt will cause a small, temporary decrease in your credit score. However in the long term, your credit score should improve.

As you continue to make payments on time, your payment history will look much better. You will also be utilizing less of your overall credit. These factors ultimately lead to a more appealing credit report and higher credit score.