Does Debt Consolidation Hurt Your Credit?

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Does debt consolidation affect your credit?
How debt consolidation can help your credit score | How debt consolidation can hurt your credit score |
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Ways debt consolidation can help your credit score
- Builds a history of on-time payments: Responsible repayment behavior is the most important factor in calculating your credit score. If you take out a loan to pay off your debt, and then make all the loan payments on time, it could help build your score.
- Lowers your credit utilization: Your credit utilization, or the amount of available credit you’re currently using, accounts for 30% of your credit score. Generally, the lower your credit utilization, the better your score. If you consolidate your debts, then successfully pay them off, your credit utilization ratio should go down.
- Can help diversify your credit mix: Juggling a few different types of credit products may help grow your score. For example, if you have revolving credit, like credit cards, adding installment credit, like a debt consolidation loan, could show credit diversity.
Ways debt consolidation can hurt your credit score
- Requires a hard credit inquiry: Applying for a debt consolidation product requires a hard credit check, which temporarily knocks a few points off your credit score. If you’re interested in a debt consolidation loan, pre-qualifying — a way to check for loan offers — can help you compare lenders before submitting to a hard credit check.
- Could increase overall debt load: One of the main risks of debt consolidation is getting into more debt once your credit cards are newly freed up. For example, if you move your existing credit card balances to a balance transfer card, then end up using your old cards again, you may have more debt than when you started, which will likely hurt your credit score.
- May lead to missed payments: In the same way a history of on-time payments can help build your credit score, missing payments can hurt your score.
How to consolidate credit card debt without hurting your credit score
Ways to consolidate your debts
Apply for a balance transfer card
Take out a debt consolidation loan
Borrow from your 401(k)
Tap your home equity
Other debt payoff options
DIY methods
Debt management plans
Debt settlement
Bankruptcy
Article sources
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