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Will Consolidating My Credit Card Debt Help My Credit Score?

July 18, 2014
Credit Cards, Credit Score
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Dealing with debt on multiple credit cards is stressful, which is why many people consider consolidating their several debts into one. There are a lot of benefits to this move, including the potential to give your credit score a boost.

If you’re not sure how consolidating your credit card debt will affect your score, take a look at the details below – the Nerds will tell you everything you need to know!

The non-credit benefits of consolidating credit card debt

Rolling multiple credit card debts into a single consolidation loan has a lot of important benefits. Before discussing how it could help your credit score, let’s review the non-credit perks of consolidating credit card debt.

First and foremost, consolidation could save you big bucks on interest payments. As of July 2014, the average credit card interest rate is hovering around 15%. If you’re carrying debt on several cards with this interest rate, you might be shelling out hundreds every month in interest. By consolidating with a personal loan or 0% APR card, you’ll cut your finance charges dramatically. This savings can be reinvested in your debt payoff to eliminate your balance faster.

Another advantage to consolidation is that you’re moving from multiple monthly debt payments down to just one. This will help simplify your financial life and make it easier to plan your budget.

Consolidating credit card debt could help your credit score

In addition to the advantages described above, consolidating your credit card debt could also help your credit score. If you choose to consolidate with a personal loan, you’ll likely see a jump in your score within a few months.

This is because, in doing so, you’re quickly reducing your credit utilization ratio. Your credit utilization ratio is the amount you owe on your credit cards relative to the total amount of credit you have available. It heavily influences a whopping 30% of your credit score, and if you have several maxed-out cards, yours is probably sky-high.

But keep in mind that only the balances on revolving lines of credit are factored into your credit utilization ratio; by moving your credit card debt onto an installment loan (the personal loan), you’re shifting it in such a way that it will have a minimal impact on your credit. As a result, your score will likely improve.

If you choose to consolidate with a 0% APR card via a balance transfer, the picture is a little more complicated. On the one hand, opening the 0% APR card will increase your available credit, which will help your utilization ratio. Plus, you’ll pay off several cards with big balances as part of the consolidation. But on the other hand, you’re probably going to end up carrying a very high balance on the new card, which is not ideal. In a perfect world, you shouldn’t be using more than 30% of your available credit on any card at any point in time.

All this is to say that consolidating with a 0% APR card might help your credit score somewhat, but you’ll probably see bigger gains by opting for a personal loan.

Nerd note: Remember that any time you obtain new credit your credit score will lose a few points temporarily. This means that consolidating your credit card debt with either a personal loan or a 0% APR card will cause a short-term dip. However, the long-term gains you’ll see in interest savings and your credit score make this move worthwhile for most people.

Be sure to think carefully about consolidation before moving forward

Although consolidating your credit card debt is advantageous in a lot of ways, there are a few questions to ask yourself before moving forward:

  • How’s my credit? If you don’t have a sterling score, you might not qualify for a 0% card or a good rate on a personal loan.
  • Am I prepared to pay on time? If you choose to consolidate with a 0% card and then miss a payment, your deal will likely be canceled and you’ll have to start paying interest right away.
  • What are the fees involved? Personal loans sometimes come with origination fees, and you’ll probably have to pay a balance transfer fee to consolidate with a 0% card. Be sure to factor these costs into your calculations when you’re deciding if consolidation is worth it.
  • Have I changed my ways? Consolidation treats the symptom of a larger problem – overspending on credit cards. To tackle the problem itself, take a hard look at your spending habits and make changes where necessary.

The bottom line: Among its other benefits, consolidating your credit card debt has the potential to help your credit score. Just be sure you’ve considered all the Nerds’ points before moving forward with consolidation.

Credit card debt stress image via Shutterstock