How Bad Is Debt Consolidation for Your Credit?

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Americans hold over $1 trillion in debt, meaning it’s no wonder that delinquencies and defaults are on the rise. It’s easier than ever to fall behind on your payments—and to let your credit score fall in turn.

But if you’re trying to turn a new page through debt consolidation, you may be wondering if this strategy will negatively impact your financial standing. After all, which debt consolidation strategy should you use? And does debt consolidation hurt your credit?

Here’s what you need to know about how to consolidate your debt.

What Are the Ways to Consolidate Your Debt?

Before we start talking about debt consolidation and your credit score, it’s important to know that there’s more than one method of debt consolidation. The methods below work by combining all of your existing debt payments into a single monthly bill, and you’ll need a decent credit score to qualify for either of them.

The first option is debt consolidation on your own through a 0% interest credit card. To do this, you’ll transfer any existing balances onto the new card, earning 0% interest as you pay off the amounts. However, you’ll need to pay off the full balance during the credit card’s promotional period, so it helps to have a budget and payment strategy in place for this.

The other option is a fixed-rate debt consolidation loan. Essentially, you’ll be taking out a loan to pay your debts in full, and then you’ll pay off the new loan in set installments.

There are other types of debt consolidation, of course, like home equity loans or 401(k) loans. However, these are much less common, as they involve more risk and aren’t recommended unless you’re in dire financial straits.

To know which option is right for you, you may be better off speaking with a financial advisor. These experts can help you decide between debt relief, including debt consolidation vs.bankruptcy, and they can help you construct a financial plan to offer a little more peace of mind.

Does Debt Consolidation Hurt Your Credit?

In general, debt consolidation does not hurt your credit—but it all depends on how you handle it.

You’ll likely see a small dip in your credit score on the front end as you make changes, as the recommended options above will require a hard pull on your credit. However, this small dip is worth it if it allows you to increase your credit score over the long term.

Don’t forget that debt consolidation won’t affect your credit as long as you change your habits. If you revert back to old methods that leave large balances on your credit cards, or if you fail to make payments on your loan, you may find yourself with worse credit than you had before.

Find the Financial Strategy That Works

At the end of the day, the right strategy is the one you can stick to without reverting to old habits. Now that you’re no longer wondering, “Does debt consolidation hurt your credit?” it’s time to get started. Inspect your finances, do your due diligence, and take a step toward your financial goals with careful debt consolidation strategies.

For more of the financial insights to help you put your best foot forward, check out our other posts.

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