If you have multiple bills coming in with varying payments and due dates, and you’re having trouble keeping up with it all, consolidation can be an effective way to streamline your payments and save you money, to boot. However, you do want to come away from consolidation with your credit relatively unscathed. So, here’s how to consolidate debt without hurting your credit.
What is Debt Consolidation?
With this financial strategy, you’re basically merging multiple balances into a new loan with a single payment at a lower rate. There are multiple ways to consolidate, including through:
- A home equity loan or credit line. If you own your home and have equity in it, you can take out a loan that uses your home as collateral. Because debt consolidation loans are secured by your property, your interest rate will be relatively low. Be certain you can make payments, though, or else you can lose said home.
- Your retirement account. It may be possible for you to borrow from your retirement account to consolidate your debt. You’ll be dunned with taxes and penalties, though, if you don’t repay the loan as directed by your plan’s rules.
- A personal loan. A personal loan with a lower rate – consolidation doesn’t make much sense unless you save money – would permit you to erase your higher-interest balances and pay off debts quicker. If you’re interested in a loan, learn more at Achieve.
- A balance transfer credit card. Card companies occasionally issue 0-percent balance transfer cards. If your credit is good enough, you can get one and shift your higher-interest balances onto it. You’ll need to be sure to pay the debts off before the promotional period ends – you’ll have around a year – and the rate goes back up.
Can Debt Consolidation Hurt Your Credit Scores?
It can, but only in the short term. Here’s how your score can drop:
- Through a hard inquiry. Applying for a personal loan or balance transfer card necessitates a hard pull on your credit which will cause your scores to drop by a few points.
- Through the opening of a new account. You’ll temporarily lower your scores when you open a new account such as a personal loan or credit card. Lenders do view new credit as a fresh risk.
- By lowering the average age of your credit portfolio. Your scores rise as your credit accounts age and your reports indicate a favorable payment history. Your scores may temporarily fall when you open a new account, which decreases your average account age.
Are There Ways Consolidation Can Help My Credit?
Well, yes. There are positives when it comes to consolidation and your credit. To wit:
- Consolidation can decrease your credit utilization ratio. This ratio gauges the amount of credit you’re using relative to how much you have available. Thus, your utilization ratio may drop when you open your new account. Why? Because the consolidation account will raise the amount of credit available to you. In fact, a lower ratio can offset some of the unfavorable effects discussed above of opening a new account.
- Consolidation can improve your payment history. At length, on-time payments on your new, consolidation loan will cause your scores to rise. Because payment history is the No. 1 factor in terms of credit scoring, it’s imperative that you make all your payments on time.
So, yes, you can consolidate debt without hurting your credit for the long haul. Any negatives are merely short-term dings that you can counter with solid payment history. Further, as you can see, debt consolidation can even help your credit. So, don’t hesitate to employ the strategy if it otherwise suits your needs.