How To Consolidate Debt Without Hurting Your Credit | Bankrate (2024)

How To Consolidate Debt Without Hurting Your Credit | Bankrate (1)

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Consumer debt — from credit cards and student loans to personal loans and auto loans — reached record highs in the second quarter of 2022, according to the Federal Reserve Bank of New York. If you’re among the group of Americans carrying high debt loads, chances are you’re seeking creative solutions to find relief from those overwhelming balances.

Debt consolidation is a popular option that can help streamline the repayment process if you owe several creditors. You can organize your accounts in one place and possibly save money by securing a lower interest rate. Still, this approach is not without drawbacks, so you should familiarize yourself with what debt consolidation entails and ways to minimize the potential negative effects.

How does debt consolidation work?

Debt consolidation is taking multiple loans and refinancing them into one loan with a new lender. There are multiple ways to consolidate your loans. The most popular way is to take out a personal loan and use those proceeds to pay off your other debts, but some consumers prefer to use home equity loans or HELOCs.

The process is largely the same regardless of the type of loan you choose. You’ll start by comparing interest rates among a few lenders to see which offers you the best deal, and you’ll apply for enough money to cover your existing debts. Once you receive your loan funds, you’ll pay off your debt and begin making payments on your new loan.

  • To illustrate with Bankrate’s debt consolidation calculator, assume you have the following outstanding balances:

    • Credit card #1: $5,000 balance, 15.9% interest rate, $141 monthly payment
    • Credit card #2: $7,500 balance, 17.9% interest rate, $220 monthly payment
    • Credit card #3: $10,000 balance, 19.9% interest rate, $304 monthly payment
    • Auto loan: $12,500 balance, 6% interest rate, $350 monthly payment
    • Personal loan: $4,000 balance, 11% interest rate, $250 monthly payment

    If you take out a 48-month debt consolidation loan with an interest rate of 7.5 percent, your total monthly payment will drop from $1,265 to $943. Plus, you’ll save $5,164 in interest.

Does debt consolidation hurt your credit?

Debt consolidation loans can hurt your credit, but it’s only temporary. The lender will perform a credit check when you apply for a debt consolidation loan. This will result in a hard inquiry, which could lower your credit score by 10 points. Hard inquiries will only affect your credit score for one year.

Your credit score could also be negatively impacted if you close your credit accounts after consolidating the balances. The average age of your credit accounts makes up 15 percent of your credit score, with a higher age being better for your score. When you open a new account or close an older account, the average age of your credit history will decrease. So, it’s best to keep your old cards open — even if you never use them.

Despite the potentially negative impacts of debt consolidation, this debt management approach can improve your credit score over the long term. Payment history is 35 percent of your credit score, so making on-time payments will increase your score. If you only have revolving credit like credit cards, adding a personal loan for debt consolidation can improve your credit mix and boost your score.

Furthermore, your credit utilization — up to 30 percent of your credit score — could 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 greater than 10 percent, you may see a ding on your credit score. However, if you pay off that balance with a personal loan, the utilization percentage will drop, and your credit score will improve.

When it makes sense to consolidate your debt

The most common reason to consolidate your debt is to save money on interest. If you can consolidate your debt and get a lower interest rate, you could save hundreds or even thousands of dollars in total interest.

Another popular reason to consolidate debt is to simplify your monthly payments. If you struggle to pay your bills on time because of different due dates, consolidating could make it easier to manage your finances.

The smartest way to consolidate your debt

The most efficient strategy to consolidate your debt starts with making a list of your current loans and credit cards. Include the total balance, interest rate, minimum monthly payment and total remaining payments.

Next, decide what kind of debt consolidation option you’d like, whether that’s a personal loan, home equity loan or balance transfer credit card. You should get quotes from multiple lenders and compare APRs, terms and total interest paid.

Make sure to apply for these loans and credit cards within two weeks to avoid multiple hard inquiries on your credit report. Once you have all of your offers, you can compare them with this debt consolidation calculator to see which lender you should choose.

3 alternatives to debt consolidation loans

If debt elimination is your goal but you’d rather not take out a debt consolidation loan, there are a few alternatives you can consider:

  • Debt management plan: These are offered by nonprofit credit counseling agencies who will attempt to negotiate more favorable terms on your behalf. And instead of making payments to your lenders directly, you’ll make one monthly payment to the agency, which will then pay your creditors.
  • Credit card balance transfer: You could save even more in interest with a balance transfer credit card. These cards come with a balance transfer fee of 2 to 5 percent, but the cost savings are still likely greater than if you took out a personal loan.
  • Budget overhaul: Create a realistic spending plan incorporating your debt payoff goals. Trim expenses where you can, search for ways to earn moreandallocate those extra funds towards your debt balances.

The bottom line

A debt consolidation loan is one option to pay down your debt. The best way to consolidate your debt without hurting your credit is to create a plan and stick to it. While your credit score may decrease temporarily, managing your debt and making on-time payments will help improve your score.

Though a debt consolidation loan is a great choice for some, you also have other options. Creating a debt management plan, taking advantage of a credit card balance transfer or overhauling your budget are other ways to consolidate your debt with minimal hurt to your credit.

Learn more:

  • Debt consolidation pros and cons
  • 5 best debt consolidation options
  • Best debt consolidation loans
How To Consolidate Debt Without Hurting Your Credit | Bankrate (2024)

FAQs

How can I consolidate my debt without affecting my credit score? ›

Best Options to Consolidate Debt Without Hurting Your Credit
  1. Personal Loans. A personal loan is one of the most common methods of merging multiple debts into one. ...
  2. Home Equity Loans. With a home equity loan, you can borrow against your home's equity and use the money to pay off existing debts. ...
  3. Balance Transfers.
Sep 13, 2023

How can I get out of debt without ruining my credit score? ›

How to Minimize the Impact Debt Consolidation Has on Your Credit
  1. Consider keeping old credit cards open. ...
  2. Pay off a balance transfer quickly. ...
  3. Avoid applying for multiple loans or credit cards. ...
  4. Pay on time.
Aug 15, 2023

How can I raise my credit score 200 points in 30 days? ›

Try paying debts and maintaining your credit utilisation ratio of 30% or below. There are two ways through which you can pay off your debts, which are as follows: Start paying off older accounts from lowest to highest outstanding balances. Start paying off based on the highest to lowest rate of interest.

How do I get rid of $30 K in credit card debt? ›

How to Get Rid of $30k in Credit Card Debt
  1. Make a list of all your credit card debts.
  2. Make a budget.
  3. Create a strategy to pay down debt.
  4. Pay more than your minimum payment whenever possible.
  5. Set goals and timeline for repayment.
  6. Consolidate your debt.
  7. Implement a debt management plan.
Aug 4, 2023

Will I lose my credit cards if I consolidate my debt? ›

If you get approved for the card, the creditor will not require you to close your other cards. And even with a debt consolidation loan, you may only face an account closure restriction in some cases.

Can you still use credit cards during debt consolidation? ›

Once your credit card balance is zero, you can still use it as long as you don't close the account. But if having it open will tempt you to rack up more charges, then closing it may be beneficial.

How to pay $30,000 debt in one year? ›

The 6-step method that helped this 34-year-old pay off $30,000 of credit card debt in 1 year
  1. Step 1: Survey the land. ...
  2. Step 2: Limit and leverage. ...
  3. Step 3: Automate your minimum payments. ...
  4. Step 4: Yes, you must pay extra and often. ...
  5. Step 5: Evaluate the plan often. ...
  6. Step 6: Ramp-up when you 're ready.

What is the best debt relief program? ›

Summary: Best Debt Relief Companies of April 2024
CompanyForbes Advisor RatingBBB Rating
Accredited Debt Relief4.0A+
Money Management International4.0A+
CuraDebt3.9A+
New Era Debt Solutions3.8A+
3 more rows
Apr 1, 2024

Is the National Debt Relief Program legit? ›

National Debt Relief is a legitimate company providing debt relief services. The company was founded in 2009 and is a member of the American Association for Debt Resolution (AADR). It's certified by the International Association of Professional Debt Arbitrators (IAPDA), and is accredited by the BBB.

Is A 650 A Good credit score? ›

As someone with a 650 credit score, you are firmly in the “fair” territory of credit. You can usually qualify for financial products like a mortgage or car loan, but you will likely pay higher interest rates than someone with a better credit score. The "good" credit range starts at 690.

Can I buy a house with a 515 credit score? ›

The lowest credit score typically required to buy a house is 500 with an FHA loan, which requires the borrower to make a 10% down payment. For credit scores of 580 or higher, a 3.5% down payment is sufficient.

How can I raise my credit score 100 points overnight? ›

10 Ways to Boost Your Credit Score
  1. Review Your Credit Report. ...
  2. Pay Your Bills on Time. ...
  3. Ask for Late Payment Forgiveness. ...
  4. Keep Credit Card Balances Low. ...
  5. Keep Old Credit Cards Active. ...
  6. Become an Authorized User. ...
  7. Consider a Credit Builder Loan. ...
  8. Take Out a Secured Credit Card.

How can I clear my credit card debt without paying? ›

Bankruptcy is your best option for getting rid of debt without paying.

How can I pay off my debt fast with low income? ›

To pay off debt quickly, focus on increasing your payments, starting with high-interest debts first, while minimizing new debt. Utilize strategies like the debt snowball or debt avalanche, and consider consolidating debt for lower interest rates if feasible.

What is the avalanche method? ›

In contrast, the "avalanche method" focuses on paying the loan with the highest interest rate loans first. Similar to the "snowball method," when the higher-interest debt is paid off, you put that money toward the account with the next highest interest rate and so on, until you are done.

Is it good idea to consolidate debt? ›

Consolidating debt can be a good idea if you have good credit and can qualify for better terms than what you have now and you can afford the new monthly payments. However, you might think twice about it if your credit needs some work, your debt burden is small or your debt situation is dire.

How much debt is too much to consolidate? ›

Success with a consolidation strategy requires the following: Your monthly debt payments (including your rent or mortgage) don't exceed 50% of your monthly gross income.

What should my credit score be to consolidate debt? ›

Every lender sets its own guidelines when it comes to minimum credit score requirements for debt consolidation loans. However, it's likely lenders will require a minimum score between 580 and 680.

What is the fastest way to consolidate debt? ›

Debt consolidation options
  1. Balance transfer credit card. The best balance transfer cards often come with zero interest or a very low interest rate for an introductory period of up to 18 months. ...
  2. Home equity loan or home equity line of credit (HELOC) ...
  3. Debt consolidation loan. ...
  4. Peer-to-peer loan. ...
  5. Debt management plan.
Jan 19, 2024

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