Debt consolidation can sound intimidating, or something that requires professional help. But consolidating your debts with a personal loan doesn’t have to be scary or complicated. In fact, when used properly, a debt consolidation loan can be a helpful tool for managing debt if you find it difficult to juggle multiple debts and due dates. You can take control and consolidate debts on your own once you understand the basics.
When you consolidate, you’re simply taking out one new loan and using it to pay off multiple existing loans or bills. Ideally, you’d aim to qualify for a personal loan that offers a lower APR than the APRs of your debts, because that will save you money in the long term and help you pay it off faster.
In addition to making your debt easier to manage, debt consolidation can be helpful to your credit score, too.
“If you consolidate multiple other debts into a new personal loan, your credit score would likely be improved. You would free up available balance on all of the debts you transfer to the new loan,” said Melinda Opperman, executive vice president of Credit.org, a nonprofit consumer credit counseling agency.
How debt consolidation can help your credit
One monthly payment makes it easier to manage payments. Fewer missed payments = credit score boost.
When you consolidate multiple debts with a debt consolidation loan, what you’re left with is one new monthly payment instead of several payments to keep track of. As a result, you may be more likely to make on-time payments, which will improve your credit score.
It may be easier to budget.
If you’ve missed payments in the past, which hurt your credit score, it could be because you’re constantly juggling different minimum payment requirements with different due dates. Some months, you may not have enough on hand when your bills are due. When you use a personal loan to pay off your debt, you apply for a personal loan at a fixed rate and a fixed repayment term. Because the rate and term are fixed, you’ll know exactly what your monthly payment will be each month and how long it will take to pay it off, so you can budget accordingly.
You’ll decrease your credit utilization ratio.
If you use that new debt consolidation loan to pay off high-interest debts, it can also help you pay off debt faster because you won’t be accumulating as many finance charges.
And, as the balances on those debts fall, so does your credit utilization ratio. Your utilization ratio refers to the amount of credit you used over the total amount of credit available to you on your cards. Credit utilization counts for 30 percent of your FICO score. The higher your utilization, the more damage it can do to your credit score.
Ideally, you should aim to use no more than 20 to 30 percent of your overall credit limit, but that’s not always easy if you’re struggling to keep up with multiple debts.
You can pay off delinquent debts.
The consolidation loan may help you pay off some outstanding balances or delinquent debts, causing your score to improve. You can use debt consolidation to consolidate almost any type of unsecured consumer debt, including credit cards. medical bills, utility bills, payday loans, student loans, taxes and delinquent debts that have gone to collection.
Delinquencies negatively impact the payment history part of your FICO calculation depending on how late they were, how much you owe, how recent a delinquent account is and how many delinquencies you have. Based on where you started, your score improvement will vary.
You can diversify your credit file.
Opening a personal loan can add some diversity to your credit mix, which accounts for 10 percent of your FICO credit score. When you open the personal loan, an installment account will be added to your credit report. It’s beneficial your score to have a mix of both revolving credit like credit cards and installment accounts like a personal loan.
The personal loan is an installment debt, not a revolving line of credit like a credit card, so having the new debt on your credit report would have less of a negative impact on your credit score, Opperman told MagnifyMoney.
How debt consolidation can hurt your credit
Debt consolidation can boost the credit scores of consumers struggling to manage several debts such as high-interest credit card debt, medical debt and student loans — if used properly. That said, there are some scenarios in which consolidation could, in fact, cause more harm than good to your credit score.
You may see a minor hit to your credit score (at first).
When you apply for a personal loan, the creditor has to pull your credit report to qualify you for the loan. They do what’s called a hard pull, which will add an inquiry to your credit report. This will cause your credit score to dip a bit, as new credit inquiries account for about 10 percent of your FICO credit score. But, your utilization accounts for more — 35 percent— of the calculation. So while your score may take a minor hit, significantly reducing your utilization with debt consolidation should benefit your score more.
You can avoid adding several inquiries to your report by getting prequalified for a loan. When you are prequalified, the creditor does a soft pull of your credit report to see if you are likely to meet the criteria for a loan. The soft pull does not result in an inquiry added to your credit report so your score won’t take a hit.
It’s important to note: Being prequalified for a loan does not mean you will be approved once you submit an application, or that you will receive a loan on the terms you were prequalified for. But, it does allow you to shop around and compare your options before applying. Use our table below to compare the best debt consolidation loans for you!
Compare Debt Consolidation Loans
It can be easy to get into even more debt.
Using a personal loan to consolidate your credit card debt can be risky for anyone who hasn’t yet learned to keep bad spending habits in check, as they could end up in even more debt and cause further damage to their score. The danger comes not with the personal loan itself, but what happens after you use it to pay off your old debts. If you use it to pay off credit cards, for example, you may be tempted to start running up charges on those cards again.
“If you start using the freed-up revolving debt balances to spend, you will be right back where you started, and worse,” said Opperman. “A personal loan for debt consolidation can help, but you have to be fully committed to paying on time and not increasing your revolving debt balances.”
Creating and following a budget can help to combat poor spending habits. If you think it may be too difficult not to use your cards, cutting them up or literally freezing them by placing them in a plastic bag with water and sticking it in the freezer can help make it more difficult to use them. Some credit card issuers allow you to lock and unlock your cards online or by using an app. Having to unlock your card to use it can act as an additional step in preventing overspending.
An alternative to debt consolidation loan: A balance transfer credit card
Balance transfers can work if you have credit card debt specifically.
When you use a balance transfer credit card to consolidate credit debt, you transfer the balances on your other credit cards to a credit card that charges a lower interest rate. Ideally, the card you use to do a balance transfer will be a new credit card with a 0% promotional period for balance transfers, so you won’t be charged any interest while the offer lasts while you pay down the balance on the card. One caveat: To qualify for the best balance transfer credit card’s you’ll need Excellent/Good credit.
When you open the new credit card, your overall credit utilization should fall, because you will have more credit available to you overall. The decrease in utilization should boost your credit score. If you pay off a card or two using the balance transfer, that action may boost your credit score, too. Unless you absolutely have to, do not close the credit card you pay off. If you do, you will not only decrease the total amount of credit available to you, but you will also reduce the average length of your credit history, which accounts for 15 percent of your credit score.
Beware: Even with 0% intro APR balance transfer offers, you may be required to pay a fee — usually 3 to 5 percent of the amount you transfer — to complete the balance transfer.
- Regular APR
- 13.49% - 24.49% Variable
- Intro Purchase APR
- 0% for 6 months
- Intro BT APR
- 0% for 18 months
- Annual fee
- Rewards Rate
- 5% cash back at different places each quarter like gas stations, grocery stores, restaurants, Amazon.com and more up to the quarterly maximum, each time you activate, 1% unlimited cash back on all other purchases - automatically.
- Balance Transfer Fee
- 3% intro balance transfer fee, up to 5% fee on future balance transfers (see terms)*
Time is of the essence when you use a balance transfer credit card to consolidate debts. If you open a new card with an introductory 0% interest offer on balance transfers, you need to prioritize paying off the balance before the period ends and the APR goes up. If you’re worried you won’t pay off the balance in time, setting up autopay to pay the balance down and setting a reminder a couple months ahead of the promotion’s expiration date can help you keep your paydown on track.
Using a balance transfer also comes with the risk of racking up even more credit card debt if you haven’t learned to manage your spending. Although you will have more credit to work with, charging expenses to your newly paid-off card could increase your utilization ratio, and further damage your score. You can freeze or cut up the new card once you receive it if you fear you’ll start using it. Check out this article for some great tips on staying out of debt after using a balance transfer.
The bottom line
When used properly, debt consolidation can be extremely helpful to your credit score. The terms you receive on a debt consolidation loan is largely dependent on your credit rating and debt-to-income ratio at the time you apply. The method could backfire if you haven’t yet resolved your reason for racking up debt in the first place. But, if you use a debt consolidation loan with the intention to become debt-free, debt consolidation could significantly help your credit score.
Personal Loans AD
As low as 3.99% APR
5.99% To 20.01% APR
Marcus by Goldman Sachs®
6.99% To 28.99% APR
4.99% To 16.79%* APR
By clicking “See Offers”, you may or may not be matched with the lender you clicked on or any lender below. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.