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Knowing the impacts that debt consolidation can have on your credit is as important as the consolidation itself. Do it right and your scores can climb accordingly. Do it wrong and your efforts can backfire.
In the short term, debt consolidation may lower your score, but in the long run it could actually improve your credit rating.
Creditors pull a hard credit check when you take out a new loan or credit card, which temporarily lowers your credit score. Getting a balance transfer credit card can cause your score to dip even more, as having a high balance on a single credit card could hurt your score. Your credit score isn’t entirely safe if you use a debt relief company either. Even if it successfully negotiates a lower balance and better rates, your creditor might report bad debt, which hurts your credit score.
Using a debt consolidation loan might be a better choice for someone concerned about their credit score, especially if it helps you pay off your debt on time and quickly. That’s because on-time repayments are the most important factor in your credit rating — especially your FICO rating.
No matter which method you choose, remember: Less debt means better credit. If debt consolidation can help you reduce your debt, it will ultimately help your credit score.
While everyone’s situation is different, there are a few ways to lesson the impact to your credit while consolidating debt:
Having a solid credit score can open the doors to more favorable rates and terms when you’re comparing consolidation options. If your goal is to have one monthly payment, shop around for a 0% balance transfer credit card or a low-interest debt consolidation loan.
Another option is to take out a home equity line of credit, though you should consider the risks and weigh all options before tapping into your home’s equity.
Debt consolidation with bad credit is tricky — but not impossible. You might have to go off the beaten path to find an option that helps more than it hurts.
Getting a debt consolidation loan with bad credit
A few of your options are:
Once you’ve paid off your debts, it can take anywhere from one to two months for the credit bureaus to update your scores. Though paying off debt will likely result in a score improvement, keep in mind that your credit history and past debts will not be erased and may still show up on your report for up to seven years.
Consolidating your debts into one monthly payment can be an attractive option, but it’s important to understand the resulting positive and negative impacts to your credit score.
Before making any moves, compare your debt consolidation options. And if your debt gets too much to handle, you can always look into a debt relief company.
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